Faster release of GST aid to boost states’ capex

The release of Goods and Service Tax compensation of about Rs 86,912 crore to states by the Centre in April-May, which includes over Rs 62,000 crore from the Centre’s own revenue streams, is aimed at giving them liquidity support even as the borrowing plans of some of the fiscally weak states have been put on hold.

According to sources, many states did not get the Centre’s mandatory approval for tapping the market at least till May-end, after the Centre raised queries on their off-budget borrowings.

The five-year GST compensation for states will end on June 30. The compensation, which is constitutionally guaranteed, is aimed to ensure annual increase of 14% in states’ GST revenues over the relevant 2015-16 base.

The Centre has so far released a total of Rs 8.22 trillion to the states on this account, even as the collections of cesses for this purpose fell way short of target (see chart).

The amount released in April-May includes arrears besides the dues for the two-month period. Had the Centre gone by its earlier stance, the compensation releases would have dragged on at least till August or till enough cess was collected to pay the dues to states.

The Centre is keen that capital expenditure by states, which tend to cut back on the asset creating spending as revenue expenditures such as interest payments and salaries, doesn’t falter for want of funds.

The Centre is trimming market borrowing of states which have resorted to huge off-budget borrowing in the past two years from the quota available this year.
However, analysts said the delays in their market borrowings will prove costlier for states as the Reserve Bank of India (RBI) will likely further increase interest rates in the coming months.

The move to release full GST compensation till May is also expected to build trust among states.

The cesses levied with GST on a clutch of merit goods will remain till FY26. The proceeds will be used to service the loans of Rs 2.6 trillion taken by the Centre to bridge the huge shortfall in cess proceeds.

“This decision (release of compensation till May) has been taken despite the fact that only about `25,000 crore is available in the GST Compensation Fund. The balance is being released by the Centre from its own resources pending collection of cess,” the finance ministry had said in a statement on May 31. The Centre will recoup its funds from cess accruals from July on wards.

Of the Rs 86,912 crore released to states, Rs 47,617 crore was compensation arrears up to January 2022, Rs 21,322 crore for February-March and Rs 17,973 crore for April-May.

Eleven state governments raised Rs 22,500 crore through state development loans (SDLs) on May 31, 2022, nearly 28% higher than the indicated level. With Goa, Gujarat, Kerala, Meghalaya and Tamil Nadu borrowing for the first time in FY23, the number of states that issued SDLs increased to 11 on May 31 from 1-7 in the earlier auctions held in this fiscal.

“The delay in approval by the Centre (under Article 293(3) of the Constitution) was due to the Centre seeking a lot of data from states on various off-budget liabilities, including guarantees given to state undertakings in FY21 and FY22,” a state government official said.

As many as nine states (Assam, Chhattisgarh, Himachal Pradesh, Madhya Pradesh, Nagaland, Sikkim, Telangana, Uttar Pradesh and Uttarakhand), which had initially indicated they would borrow during April-May FY2023, are yet to access the SDL market. Possibly, these states are still awaiting the borrowing permission from the Government of India, as the related guidelines have undergone a change in FY23, rating agency Icra said.