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    Finance minister Nirmala Sitharaman appeals opposition-ruled states to consider borrowing option 1

    Synopsis

    In letters sent out to chief ministers, the Union finance minister has elaborated that the special window being provided to states and that Centre will undertake the borrowing and pass on to states via back to back loans. Further, principal and interest was being paid out of the compensation cess fund, such that states are not burdened.

    statesAgencies
    The solution offered by the Centre to states on Thursday marked a dramatic shift in stand that is likely to resolve the row over the burning issue of meeting the shortfall in compensation cess.
    Finance minister Nirmala Sitharaman has asked opposition-ruled states to reconsider their stand and take the borrowing option 1 where Rs 2.16 lakh crore was being provided for meeting compensation cess shortfall.
    In letters sent out to chief ministers, the Union finance minister has elaborated that the special window being provided to states and that Centre will undertake the borrowing and pass on to states via back to back loans. Further, principal and interest was being paid out of the compensation cess fund, such that states are not burdened.

    17 oct


    "In the collective interest of the Union, the states and most importantly the citizens of India, I request you to kindly reconsider your government's stand on this issue and join the other states in the solution that has been worked out," Sitharaman said. A copy of one of the letters was seen by ET.

    The finance minister has said that states will get collective funding of Rs 2.16 lakh crore, of which Rs 1.1 lakh crore will come from the special window and Rs 1.06 lakh crore will come from 0.5% of state gross domestic product which has been permitted unconditionally.

    Under Option 1, the Union government will arrange the borrowing in such a manner that the cost will be at or close to the interest rate of the Union government, Sitharaman said, adding that the additional debt through the special window will not be accounted for as states' debt for the purpose of the Finance Commission and other norms.

    "This will enable ease of coordination and simplicity in borrowing, apart from ensuring a favourable interest rate," she said. She said that the quantum of resources was adequate to meet the entire compensation amount that would have been payable this year.

    While interest and principal will be met from future proceeds of cess, the entire arrears of compensation will eventually be paid to the states, subject to deduction of amounts needed for servicing the borrowing.

    States will not face any cash shortfall relative to the hypothetical situation if they had got the total compensation under the Act, she added.

    The solution offered by the Centre to states on Thursday marked a dramatic shift in stand that is likely to resolve the row over the burning issue of meeting the shortfall in compensation cess.

    The altered option was provided after no conclusion was arrived at even after three GST Council meetings, including one held on Monday.


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    ( Originally published on Oct 16, 2020 )
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