A large borrowing programme is inevitable; data and economic uncertainties show that States cannot handle the matter. Clearly, the Centre is reneging on its promise to the States. The implication is that the States are on their own — cooperative federalism is a casualty.

The Goods and Services Tax (GST) Council meeting has now been deferred to the first week of October due to sharp disagreement between the States and the Centre, the result of the unprecedented revenue shortfall faced by them. By July-end, the Centre’s fiscal deficit had reached Rs. 8.2-lakh crore, 103% of the full year’s target and 15.23% of the lower GDP. The States face a similar situation.

The Centre had brought the States on board GST by promising higher revenue collection. Producing States such as Gujarat were sceptical because GST is a last point tax which is collected proportionately more in consuming States such as Bihar. States were lured by the promise of 14% annual growth in GST revenue over the base year of 2015-16. Any shortfall from this (for five years) was to be compensated by levying a cess on luxury and sin goods.

States have been reminding the Centre of this promise of compensation for five years. Last year, because of the slowdown in the economy and a shortfall in revenues, the transfer to States was finally made by July 2020. The transfers due since April 2020 have been withheld.

In the last GST Council meeting held on August 27, the Centre gave the States two options. First, they could borrow Rs.97,000 crore (the shortfall in the GST revenue compensation) from the Reserve Bank of India (RBI) under a special window at a low rate of interest. Second, borrow Rs.2.35-lakh crore (the total compensation shortfall) from the market with the RBI facilitating it. The burden of repayment would be borne by the future collections from the compensation cess. It was proposed that this cess which was to end in June 2022 could be extended to facilitate the repayment of the debt.

Accuracy of estimates

What is the guarantee that the cess would continue beyond 2022? If the statutory provision of 14% increase is being given up, then how sacrosanct will something that is not even a part of the GST Act be? Adverse economic circumstances may continue given the great uncertainty about the duration of the downturn.

Given the uncertainty, how accurate are the estimates of Rs.97,000 crore and Rs.2.35-lakh crore offered to the States? How are they arrived at when the Ministry of Finance is refusing to give a figure for growth in 2020-21?

Budgetary calculations

The Union Budget presented on February 1, 2020 assumed a nominal growth of 10%. But, given that the economy is still at around 60% of last year’s level, very optimistically it is likely to contract for the year 2020-21 by at least 10%. So, optimistically, the Centre’s budgetary calculations will be off by at least 20%.

Revenue will fall by much more than 20%. Corporate sector profits will fall sharply. Some sectors such as fast-moving consumer goods, or FMCG, and e-commerce will do well. But companies in sectors such as airlines, hotels and consumer durables will show losses and, therefore, pay little tax. Thus, corporation tax collection will fall sharply — much more than 20% compared to the budget estimate. Similarly, income tax collection will fall since a large number of workers have lost employment and/or have faced salary cuts. Many private firms are also likely to incur losses. So, income tax collection will also be short by much more than 20%. The direct tax/GDP per cent may be expected to fall from 5.5% last year to less than 4% this fiscal.

If GDP falls by 10% over last year, instead of being Rs.224-lakh crore, it will be about Rs.184-lakh crore. Using the lower tax/GDP ratio, direct tax revenue will be short by Rs.5-lakh crore compared to the budgeted amount. This is an optimistic guess. The States’ share of all taxes collected by the Centre is 42%, so they will lose Rs.2-lakh crore.

Greater shortfall

GST collection will also be short by much more than 20%. The production of luxury and sin goods has been severely impacted and they pay the high rate of tax — 18%, 28% and cess on top. The essential production which is affected less by lockdown either pays 0%, 5% or 12%. Due to a drastic fall in imports, the Integrated Goods and Services Tax (IGST) and customs duties will also decline. The extra tax collected on petroleum products will help counter the decline to an extent.

Consequently, the indirect tax/GDP ratio can be expected to fall from 10.5% to 8% resulting in a drop of Rs.7 lakh crore. About 60% of this loss will be from GST and half of that would be the loss of States. About half of the remaining part (Rs.2.8-lakh crore) will also be a loss of States.

The States’ GST shortfall would be about Rs.2.1-lakh crore. On top of this, they will lose 42% of the shortfall in the Centre’s collection — so another Rs. 88,000 crore. The GST collection figures are gross; input credit remains to be paid back. So, the shortfall is likely to be greater than implied by the April to August figures.

Thus, at an optimistic guess, if the economy declines by only 10%, the total tax collection will be down by about Rs. 12-lakh crore in 2020-21. The States will lose Rs.6.4 lakh crore. The States GST revenue will be short by Rs.3-lakh crore which should be compensated by the Centre. Subtracting from this the expected collection of Rs. 65,000 crore from cess we get the figure of Rs. 2.35-lakh crore.

Even if the States take the loan of Rs. 2.35-lakh crore they would have an uncovered deficit of Rs.4-lakh crore. Further, as many predictions are that the economy will be down by much more than 10% used in the calculations above, the revenue shortfall is likely to be far greater.

This points to the dire position of the Centre (and the States), and the inevitability of a large borrowing programme. Only the Centre is in a position to do such massive borrowing.


Prof Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences , earlier in JNU. He is author of several books including…  Indian Economy since Independence: Persisting Colonial Disruption.  Understanding the Black Economy and Black Money in India: An Enquiry into Causes, Consequences and Remedies

Originally published  by The Hindu




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