India needs to borrow $22 billion more to cover states’ revenue loss

India needs to borrow more to compensate its states for a shortfall in a nationwide consumption tax collection. Image Credit: AFP

New Delhi: India needs to borrow more to compensate its states for a shortfall in a nationwide consumption tax collection, Finance Minister Nirmala Sitharaman said.

The federal government will need to borrow an additional 1.58 trillion rupees ($22 billion) for the purpose, Sitharaman said in New Delhi Friday. She was speaking after a meeting of the panel on goods and services tax to discuss compensation to states, among other issues.

The amount is part of a compensation that the federal government agreed to pay states for any revenue loss on account of introduction of a nationwide GST. But the economic downturn caused by the world’s worst coronavirus outbreak risks hurting tax collection, possibly forcing the administration to consider additional borrowings, people familiar with the matter told Bloomberg News earlier this week.

A decision on the additional debt for the fiscal year started April 1 will be decided after consulting with the Reserve Bank of India, Revenue Secretary Tarun Bajaj said.

The borrowing will be in addition to the over 12 trillion rupees budgeted this year to bridge the fiscal deficit. The RBI, has so far, been able to keep yields under check through its various moves such as ‘Operation Twist’ and the announcement of a one trillion-rupee bond purchase acquisition program for the current quarter.

Any additional borrowing will replicate an arrangement followed last financial year, Sitharaman said, referring to last year’s additional 1.1 trillion rupees of debt sale on behalf of states. While the payment to states was initially supposed to be for five years starting 2017, the federal government last year extended its scope beyond 2022 to meet the revenue gap caused by the coronavirus pandemic.

The government will hold a special session to discuss the issue of compensation cess and extension of the period beyond 2022, Sitharaman said.

Although GST receipts have come in at more than 1 trillion rupees each month for seven successive months as of April, there are worries that it will slow amid regional lockdowns implemented by most states to curb the deadly second wave of the pandemic. Government spending is key to sustaining the recovery of Asia’s third-largest economy from a rare recession last year.