The issue of GST compensation is one step away from suffering a constitutional setback should States fail to pick one of the two options put on the table last week. The New Indian Express Editor GS Vasu caught up with Finance Ministers of three southern states to understand their thought process and whether States can arrive at a consensus. Here's what they had to say.
T Harish Rao, Minister of Finance, Telangana:
In the present situation, Centre and States should work to revive the economy otherwise, things will get worse. As for CST dues, Telangana was supposed to get Rs 5,604 crore, whereas we got Rs 1,957 crore. Effectively, we lost about Rs 3,800 crore. Then GST Council came in and we were assured 100% compensation and so Centre must deliver on its commitment.
Even otherwise, Telangana is losing heavily. Before GST formation, our growth rate in VAT was the highest at 22.5%. But in the national interest, considering one nation, one tax and how it can improve industrialization, we have joined GST. It's not just the Centre's alone, but the states' revenue too that's falling. So, the government should come out positively instead of giving Option 1 and 2 with conditions.
In the previous Council meetings, it was never said that states should borrow. Moreover, if Centre borrows, the interest rate will be lower as states' rates vary. But we were told if Centre borrows economy will go down, but if states borrow it won't. How can it be as both borrow from the same agencies? In fact, Centre has more scope as it can raise funds from external agencies while states cannot. There's cheap money available overseas at 0.5-1% interest, which can be borrowed and given to States. Above all, the entire Rs 2.5 lakh crore, not just Rs 97,000 crore should be borrowed, as it's now the time to get as much money as you can from the market to improve consumer confidence and spur demand.
When money is available in cess or IGST, they are all pooled in the Consolidated Fund of India. When money is to be given to states, Centre says there's no room. But it should be both ways as states like Telangana are losing heavily.
Take IGST. Telangana was supposed to get its rightful share of Rs 2,700 crore, which we have been asking for over 1.5-2 years. Similarly, we've contributed over Rs 18,032 crore so far to cess, but took only Rs 3,200 crore. If we extend the cess period further to 5-6 years, Telangana will be a big loser. Most GST Council meetings focus only on improving cess and not strengthening States. Now, let's not limit borrowings to Rs 97,000 crore but the full Rs 2.3 lakh crore. It won't affect Centre's kitty as they can recover completely including interest from state cess.
There's no question of compromise on compensation. The Act doesn't differentiate loss due to GST or COVID and the total 14% loss has to be compensated, which even the Attorney General concurred (with).
During CST, then UPA government gave us the commitment, but failed to deliver. Even the present government, under GST, is doing the same. Both failed to keep their commitments and in the future, States will be afraid to cooperate. It's not whether BJP-ruled or non-BJP-ruled states, but it's everybody's problem.
Even developed nations during world wars resorted to spending and India should do the same. Inspite of several requests, the Centre is instead cutting down expenditure. It's an alarming situation and we should think broadly, and address the issue in a positive manner.
Dr TM Thomas Issac, Minister of Finance, Kerala:
We cannot sacrifice any portion of the GST compensation, because the law is clear. The argument is that COVID is an Act of God and therefore should be separated from GST implementation revenue shortfall. But, it's legally untenable as Section 7 of the Compensation Law legally lays down compensation calculation and that the gap must be compensated every two months. There's no reference to any distinction between act of god or humans or nature. Some like northeastern states don't need compensation as they are surplus states, but others like Telangana, which saw decent GST collections in the beginning, now need compensation. For some states, the compensation level is 40-50%.
In federal relations, public trust is important and that's being blatantly undermined. Has it any economic logic?
We are facing a 24% growth contraction, while the worldwide average is 12%. What does economics teach? That governments must spend more and revive economy and demand. We are only asking the Centre to allow us to maintain our budgeted expenditure and we've factored in a 14% growth in GST. Now, in COVID times, you are aggravating the recession by denying states funds and forcing us to cut expenditure.
The GST Act says, GST Council can make recommendations and that's why we are proposing that Centre and states and GST Council should propose to borrow and provide money, which should be liquidated in 3-4 years to avoid debt burden. States must be supported, though not endlessly. But in such circumstances, the Centre has a moral and legal obligation to provide for GST shortfall.
These things go against the spirit of cooperation. For instance, as for IGST collections, it took two years to undo the discrepancies and only last year, money was used to compensate states. After several agreements, we arrived at a consensus in the GST Council, but unfortunately all efforts made so far have been undone. The last GST Council, except Assam and Goa, everyone agreed that the Centre should compensate fully, that it should borrow and give.
The bottom line is, entire compensation has to be given and there's no question of us sacrificing compensation. It's our moral right and legally untenable. And the economics is the basic thing to do. The modalities of doing it can be discussed, but don't ask us to pay for part of the compensation.
The Centre can borrow, but if they are too afraid of the optics of fiscal deficit going up, empower the GST Council to borrow only for the purpose. The government stands guarantee, and their optics are maintained.
The government must spend more or maintain budgeted expenditure. If you agree on that, that's a starting point. That's the need of the hour and the solution to the problem. How to raise the money can be discussed, but asking for expenditure cuts is unacceptable.
Basavaraj Bommai, Home Minister representing Karnataka at the GST Council:
In spite of meeting 71% of our cashflows of GST collections compared to last year, the gap exists. We all know the situation and we deliberated on what the government and states are into. Having known all this, it's imperative that we should have money at this juncture not only to fight the pandemic but also to contain the economic crisis.
In normal circumstances, we expect fiscal support from the Government of India not only in GST compensation but also otherwise. However, given the situation, everybody needs to fight together and the problem can't be treated in isolation. Therefore, in the larger interest of the State where the economy has to move on, we have opted for option 1 and the borrowing doesn't have any effect on our fiscal situation because both principal and interest will be compensated by the cess collected out of states. It's very simple.
Opposing states terming Finance Minister Nirmala Sitharaman's statement as an 'act of fraud' is totally political and such a confrontationist attitude won't give solutions to the present crisis. Therefore, I want to request all the senior members of the GST Council that this is not the time to play politics.
Secondly, the Centre has given options to states and while the Council takes decisions together, if supposing any state feels that they are strong enough to not take either of the options, it's left to them. However, no state can afford it, and I'm aware of that. Therefore, the situation has to improve by pumping in money and increasing investments. The Government of India has given us the opportunity, and it's prudent to use it and support economic revival.
Of course, the Centre has avenues, but the unprecedented contraction of GDP, has caused a dent on the macroeconomy. As for the disinvestment of PSUs, the market ecosystem isn't good enough to give us a fair price and there will be a huge loss of price. This will affect the macroeconomy, our sovereign ratings will go down, and so will FPI inflows. This will lead to a spiral effect and an overall stress on the economy, which in turn will have a reflection on the states' economy that will (have to) bear the economic losses.