Q) Monetary measures are the monopoly of the central government. Even borrowing is more efficient and less expensive if it is undertaken by the Central government. Comment in the light of the GST compensation issue. (250 words)

Why this question?

  • The Goods and Services Tax (GST) Council failed to reach consensus between Opposition-ruled States and the Centre over the plan to get States to borrow from the market to meet an estimated ₹2.35 lakh crore shortfall in compensation cess collections this year.

Introduction: It was on the basis of GST (Compensation to States) Act, 2017 that States sacrificed their constitutionally granted powers of taxation in the national interest. 

Body: Discuss the following aspects

  • GST compensation shortfall 
  • Central governments’ two options for borrowing by States to meet the shortfall
  • Concerns with borrowing by states:
    • Cess funds not shared: The Centre raised an estimated ₹3,69,111 crore revenue through cesses and surcharges in 2019-20 alone. These are not shareable with States.
    • Excess compensation fund absorbed by the center: When the GST compensation cess exceeded the amount that had to be paid to States, the Central government absorbed the surplus. 
    • States’ weak financial positions 
    • Center in better position to borrow from RBI as monetary measures are in its exclusive domain

Conclusion: As equal representatives of the citizens of the federal republic of India, State governments deserve relief through the Consolidated Fund of India.