States’ Unhappiness Index on the Rise

Context: Centre’s proposals on settling states’ demand for Goods and Services Tax compensation can throw up new challenges.

Centre’s proposal: to cover the compensation gap, the Centre has proposed two options:

• Option 1: Reserve Bank of India would create a special window of borrowing for the states to help them meet their revenue loss of about Rs97,000 crore, arising out of the GST implementation problems.

• An additional relaxation in their fiscal deficit target of 0.5 percentage point of their gross state domestic product (GSDP).

• States can use the cess proceeds to repay their interest and principal,

• Option 2: Centre would help the states access borrowing of Rs2.35 trillion from the market, but there would be no relaxation in their overall borrowing limit.

• States can use the cess proceeds for repaying the principal amount only.

• In both the options, the levy of GST compensation cess would be extended beyond the transition period of five years, which originally was to end in June 2022.

Issues with the GST Compensation resulting in States’ unhappiness

• Low revenue under-compensation fund: due to the pandemic and consequent lockdown, the revenue would not be more than Rs 65,000 crore, much less than expected at 14% growth rate at Rs 3 trillion. 
• Preferential Treatment of states: States who opt for Option 2 are at a disadvantage:

• The high cost of compensation for the states who opt for additional borrowings, who have lost revenues in the wake of COVID pandemic.
• States are denied extra borrowing flexibility.

• The relevant provisions of the law make no distinction between a revenue loss arising out of GST implementation and a revenue loss for any other reason.

• Centre’s refusal to use Consolidated Fund of India: to compensate the states for their revenue loss. While this argument has merit, it is weakened by the recent GST compensation Act amendment in 2018:

• While the original law mandated the transfer of half of the revenue (from Public Accounts of India to Consolidated Fund of India) collected only at the end of the financial year, the amendment allowed the transfer to happen any time.
• Thus, a reverse transfer can also happen in times of such a crisis induced by the pandemic. 

• Spirit of the previous discussion not being honoured now: 

• In the 8th meeting of GST Council in 2017, the power to decide the mode of generating additional resources through market borrowing was given to the GST Council as a whole and not alone to the Centre.

• Challenges in the voting:

• Current situation and the voting methodology:  75% approval for a proposal with the Centre having a one-third share of votes and the states having a two-thirds share, 
• The Centre will have to get at least 19 states to approve and require some political management.
• The opposition, even after losing, would press for dispute settlement mechanism within or outside the GST Council.