Why in the news?
- On July 1, 2017, the five-year transition period after the adoption of the Goods and Services Tax (GST) came to an end on June 30, 2022.
- GST settlement with this transition ended the entitlement of the state governments.
High estimated loan issuance
- Many state governments have asked for the recompense period to be extended by some years.
- To substantially assess the near-term view for state finances, we have to depend on the states’ estimations for their market borrowing requirements for the second quarter of 2022-23.
- The signifying calendar of market borrowings by 23 state governments and two Union territories for the 2nd quarter has pinned their total state growth loan issuance, the primary source of financing state government deficits, at Rs 2.1 trillion.
- This projected distribution is 29 per cent higher than the same period last year, and at an eight-quarter high.
- This high level of issuance projected by states glances at concerns that some rightfully have regarding the uncertainty of their cash flows in the post-GST compensation era.
- High dependence on GST compensation: Of these 23 states, Tamil Nadu, Andhra Pradesh, Haryana, Punjab and Gujarat have pointed to large additions in borrowings.
- Most of these states have an above-average reliance on GST compensation.
Implications of discontinuation of GST compensation
- Alter the revenue compensation: The cease of the GST compensation flows would change the revenue composition of some states adversely, particularly those with a relatively larger share of such receipts in their overall revenue streams.
- Increase in debt level: To cancel a portion of the associated revenue loss, such states are likely to improve their borrowings and/or undertake some expense adjustments in the quarters onwards.
Adjustment of borrowing limit of the States by the Centre
- At the time of articulating to states their yearly borrowing limits for the ongoing year, we comprehend that the Centre had informed state governments that their off-budget borrowings for the past two years (2020-21 and 2021-22) would be adapted from their borrowing ceiling this year.
- Data on off-budget borrowing: It emerges that the calculation of the adjusted borrowing limit needed the submission of detailed data by the state governments linked to their off-budget borrowings for the last two fiscal years, followed by a thorough review of the same by the Centre.
Need for an early step up in tax devolution
- Overall, though, states seem to have entered the year with a comfortable cash flow position.
- This ensues from the back-ended disclaimer of the tax devolution to states for 2021-22 — nearly half of the full-year amount was released in the fourth quarter.
- Further, the total amount was also well beyond the revised estimate, providing an unanticipated boost to states.
- This may have authorised them to temporarily resist the changes linked to their borrowing authorisation.
- Henceforth, the release of the GST compensation grant of Rs 869 billion for several months in May is feasible to have further eased their cash flows.
- If the government does settle to step-up tax devolution to the states in the near term, rather than back-ending it as was done in the last year, it may lessen the size of state borrowings in the second quarter.
- But more remarkably, such revenue inevitability, despite the end of the GST compensation era, may encourage states to border their capital spending, providing a positive stimulation to the economy.
Conclusion
- The discontinuation of the GST compensation flows would alter the revenue composition of some states adversely, tax devolution to the states in the near term could cushion the blow of the discontinuation.
- In June 2022 while the legally-binding five-year period of the settlement would end the compensation cess on sin goods and luxury items could resume up to March 31, 2026, to withdraw debts ( ₹2.69 lakh crore) increased from the market to reimburse states during the pandemic years.
