Karnataka Cabinet to borrow 33,000 crore to tide over crisis

BENGALURU: The Karnataka Cabinet on Tuesday decided to borrow Rs 33,000 crore making use of the window the RBI will soon open for states to tap the debt market to overcome the severe financial crunch the Covid-19 pandemic has thrust upon them. A series of lockdowns and poor business climate has left a gaping hole in the state finances forcing the government to borrow to feed daily governmental expenses.
Two weeks ago, the Centre placed two options before the states to compensate for the sharp drop in the GST revenues due to the pandemic. Karnataka opted for the first option under which the Centre will bear the entire principal and interest payments out of the GST cess levied on sin and luxury items.

With the Centre allowing states to borrow funds up to 5% of GSDP as a one-off measure in view of the pandemic, Karnataka has decided to make use of it.

“We have the leeway to borrow up to 36,000 crore, but the Cabinet has decided to borrow only 33,000 crore,” law minister JC Madhuswamy said in his briefing after the Cabinet meeting.

The fiscal responsibility and budget management law limits a state’s borrowing cap at 3% of its GSDP. Under the option Karnataka has chosen, it can borrow 1% of GSDP without any conditions, but it will have to meet certain timeline-linked reforms to qualify to borrow another 1% of GSDP.

All these years, Karnataka used the funds borrowed from debt market for capital investment, but for the first time, it has had to borrow to fund revenue expenditure. “All these years, we have been a revenue-surplus state, but the pandemic has left us with a huge revenue deficit,” the law minister said.

After the August 27 GST Council meeting to discuss the GST compensation payable to states, the Centre had placed two options before the states. While the first covered the revenue shortfall arising out of the implementation of GST, the second one also covered the shortfall in collections due to Covid-19 alongside shortfall due the GST implementation.

Karnataka would be eligible for a total compensation of 18,289 crore under the first option. Out of this, the GST cess collections will provide Rs 6,965 crore.

As for the remaining Rs 11,324 crore, the state government would be able to borrow through a special window which the Centre will facilitate with RBI’s help. The option will also entitle the state to an additional borrowing of up to 1% (Rs 18,036 crore) of GSDP.