October 16, 2020 4:42:52 am
A senior official said the RBI insisted that the Center borrow, rather than the states.
THE CHANGE in the Center’s stance on Thursday from turning to direct loans to cover the GST offsetting deficit occurred after the Reserve Bank of India (RBI) expressed reservations about states that were asked to they did, The Indian Express has learned. Government officials called the new mechanism “administratively convenient,” and all states borrowed at a uniform interest rate, although they acknowledged that the new route was considered after the RBI showed a preference for it. the Center will borrow to finance the
“To cover the GST deficit, the RBI wanted the central government to borrow, not the state governments. The view has been that the Center can borrow at rates cheaper than the states, at least 50 basis points cheaper. The RBI assured the Center that it will manage the Center’s loans in the best possible way, ”a senior official told The Indian Express.
Another senior official said the RBI insisted that the Center borrow, rather than the states. “RBI said you better do it this way. Because then, it is a central government that borrows instead of the states that do, ”said the official.
However, a senior official in the Department of Economic Affairs said: “Why should the RBI have problems? In any case, the states would have borrowed if they had not received this compensation. “
The urgency to change the rules and put the borrowing mechanism in place was also based on the finding that many states have an urgent need for funds, especially since only Rs 20,000 crore have been disbursed so far, while the deficit stands at 1.5 lakh crore rupees. Until July.
“States need money. Only Rs 20,000 crore has gone that far against a deficit of Rs 1.5 lakh crore until July. Roughly 50-60 billion rupees should reach the states now, ”said one official.
The threat of a legal challenge by a state also weighed in the discussions when the Center decided to modify its rules for Option 1 of the two previously offered to states to cover the deficit of this fiscal.
With Thursday’s announcement, the central government’s view is that some of the dissident states, such as Chhattisgarh and West Bengal, could change their position. On Wednesday, Tamil Nadu, which had opposed the options, had become the 21st state to opt for Option 1 – Rs 1.1 lakh crore through a special window – after indirect discussions between the Ministry of Finance and state officials.
Differential rates are also one of the concerns that led to the reversal of the Center’s stance, the sources said. The Ministry of Finance stated that this new mechanism will avoid “differential interest rates that may be charged to individual states for their respective SDL and will be an administratively simpler arrangement.”
“The problem with the differential rate was that the Sikkim rate and the Maharashtra rate are little different in the market. We did not want in this window there to be any difference between the different states. That is, the GoI has a particular rate, different states have different rates depending on your credit profile, etc. This will ensure that there is no interest rate differential between state A and state B, ”said a senior Finance Ministry official.
The Center’s decision to borrow in place of the states and then make consecutive loans to the states is seen as the central government falling from its previous position. But technically it will have no impact on the Center’s fiscal deficit, since the amounts will be reflected as capital inflows of state governments and as part of the financing of their respective fiscal deficits.
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