Union govt should enhance borrowing, Thomas Isaac writes on GST impasse

The entire compensation payment should be paid this year itself and a number should be arrived at after further discussion with states, Kerala FM Thomas Isaac says.
Kerala Finance Minister Thomas Isaac
Kerala Finance Minister Thomas Isaac
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The current year’s Goods and Services Tax (GST) compensation gap is Rs 2.3 lakh crore, of which we are expecting Rs 6,000 crore as current GST cess collection. This would leave a gap of around Rs 1.7 lakh crore. Of this, the Union government has now agreed to borrow Rs 1.1 lakh crore, leaving a gap of Rs 16,000 crore. And if the compensation cess collection is lower, this gap will widen further.

Therefore, two questions emerge: Who will borrow and how much should be borrowed. The first question has been answered with the Union government agreeing to borrow now, which we have welcomed. In fact, this is like a compromise because even though the Union government is borrowing, it will reflect on the fiscal deficit of the state. But that’s alright because that’s the way compromises work.

But the question of how much to borrow still remains. We’re saying the full compensation has to be paid in the current year itself. The lower cess has to be paid every second month. Hence having agreed to 1.1 lakh crore, why can’t the Union government enhance the borrowing? Why is there no negotiation with the states? There is no principal involved. It was Rs 97,000 crore that was going to be borrowed initially, later it was agreed to increase it to Rs 1.1 lakh crore.

There needs to be further discussion on the borrowing limit with the states to conclude this debate. I hope that better sense prevails, and the Union government will further negotiate with the states.

There are two good reasons, at present, for why the Union government should pay the whole compensation now itself. First reason is the losses that states are facing. Secondly, if you want to defer the compensation payment, the GST Council has to take the decision. The Comptroller and Auditor General (CAG) has given a clear written statement that no one has the right to extend the compensation beyond five years.

Further, there has been no decision made by the GST Council on extending compensation. Therefore, what’s being offered as GST compensation is illegal. The explanation given is that the Council decided to extend the cess collection beyond five years and hence it’s implicit that part of the compensation also be extended or deferred. This doesn’t mean anything. Whether you’re paying the full compensation in the current year or deferring part of the payment beyond five years, you will still have to extend the cess. The GST Council has only decided on the extension of the cess and not the compensation payment.

It also has to be kept in mind that GST administration has been poor and that has compounded problems for small and medium scale sectors.

This kind of an impasse over GST compensation has never happened in the GST Council. You discuss and realise that if there is consensus, one should allow the democratic process to take place and take a decision that would be binding on everybody. Instead, a decision that is discriminatory to the states that raised opposition was taken, leaving them with no option but to submit to it. That’s not the way the GST Council should function.

Secondly, there is a recession now and the borrowing should happen now, as we have to keep up the expenditure. By 2023, hopefully if the Indian economy is growing, inflation will be high, interest rate will be going up, and it may not be an appropriate time to increase expenditure.

I’m arguing that the entire compensation payment should be paid this year itself. We need to discuss and arrive at a number, and also decide how much is to be borrowed in the future or how much is to be paid in the future. That is the way out of the present crisis.

Whatever the reason may be, the Union government believes that is too much spending, which is a joke! India’s stimulus package is one of the weakest in the world. The total real stimulus as percent of Gross Domestic Product (GDP) is only 2%.

With the Union government’s earlier position, we would have gone to court. But with its changed decision (to borrow), we had a consultation, and everyone was inclined to accept it.

But we (the Opposition-ruled states) will wait and watch. We thought we should reciprocate the Union government’s gesture. The Kerala Chief Minister has also cancelled the meeting to be held with Law, Finance Secretary and Tax officials, and with the Advocate General on how to move court. It’s now for the Union government to come forward and settle the issue amicably. Of the two issues, one – who to borrow – is settled; how to borrow should also be amicably settled.

All that is needed is for the Union government to borrow from the Reserve Bank of India. That’s what all countries are doing. If the financial crisis prolongs, many small firms will shut down permanently. If the suppressant policy of the Union government continues, it will prove disastrous for the Indian economy, which is already among the worst performing economies. The economy may revive but it will be lower than other countries, and we will be left behind. That is a danger. On the other hand, demand may pick up if the expenditure is expanded and the collapse of the small-scale industries can be prevented.

The government also hasn’t extended loan moratorium to save small-scale industries from collapse. If the economy doesn’t pick up in the near future, how will they be able to pay back their loans? Kerala will be among the states that are impacted the worst (in the current economic slowdown) because the remittance fall will also be a big hit for the state, and also because the crisis comes after two consecutive floods. The revenue loss for the state due to COVID-19 will be Rs 35,000 crore. Production contraction will be 15% of the GDP, which is Rs 2 lakh crore. Overall, Kerala is in a very difficult situation.

Demonetisation kept the economy downhill for consecutive quarters, that was the real cause for this crisis. When COVID-19 emerged, the Indian economy was already on the verge of a breakdown, and the pandemic only aggravated it.

There is no way out other than the government spending more and carrying out required structural changes. Without spurring demand, the reforms won’t have any impact.

The states now need to cut down on expenditure to manage with the available funds, as the state governments can’t borrow independently or print money.

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