An uncertain transition: As GST compensation ends, state governments need to be provided certainty of revenues

Source: The post is based on the article “An uncertain transition: As GST compensation ends, state governments need to be provided certainty of revenues” published in Indian Express on 11^th July 2022.

Syllabus: GS 3 – Indian Economy and issues relating to planning, mobilization, of resources.

Relevance: About the impacts of GST Compensation.

News: The Goods and Services Tax (GST) has completed its 5th year since its inception on 1 July 2017. With this, the era of GST compensation that the state governments were entitled to has also ended. Many state governments have asked for the compensation period to be extended by a few years.

The discontinuation would alter the revenue composition of some states adversely. Especially to those states with a relatively larger share of revenue receipts in their overall revenue streams.

How dependent States are on GST Compensation?

The indicative calendar of market borrowings by 23 state governments and two Union territories for the second quarter has pegged their total state development loan issuance at Rs 2.1 trillion.

Note: state development loan issuance is the primary source of financing state government deficits.

Of these 23 states, Tamil Nadu, Andhra Pradesh, Haryana, Punjab and Gujarat have indicated large increases in borrowings. Most of these states have an above-average dependence on GST compensation.

About the restriction on off-budget borrowings of states

The Centre had informed state governments that their off-budget borrowings for the past two years (2020-21 and 2021-22) would be adjusted from their borrowing ceiling this year. This requires the detailed data calculation of the adjusted borrowing should be submitted to the Centre. This will be followed by a thorough assessment of the same by the Centre.

Despite changes in off-budget borrowings, Andhra Pradesh, Maharashtra, Haryana and Punjab were able to raise bonds in the first few weeks of the first quarter.

What are the remedial measures?

The tax devolution to states for 2021-22 was released in the fourth quarter. This may have allowed them to temporarily withstand the changes related to their borrowing permission.

If the government decides to increase tax devolution to the states, then it might reduce the size of state borrowings further. But such an increase in tax devolution may encourage states to ringfence their capital spending and provide a positive impulse to the economy.