Top government officials told TOI that the compensation mechanism and calculations of what it should be has been “hard wired” into the law and the proposals put before the states were based on two rounds of consultation with attorney general K K Venugopal.
“It is absolutely clear that the funds must come from the cess and the 14% is calculated on a base year of 2015-16 for all states. This is the basis on which the Rs 97,000 crore figure has been arrived at while assuming 10% nominal growth,” explained a source in the government.
The finance ministry has considered possible options over the last two months since finance minister Nirmala Sitharaman assured states that there will be a GST Council meeting just to address the issue of compensation.
She has been part of meetings that might usually involve only officials at a stage where options are being studied before being put before the minister, sources told TOI. It was felt that she should provide necessary guidance in a matter that is of central importance to the finances of the Centre and states.
Opposition-ruled states are demanding that the Centre take over the burden and are expected to lodge their protest over the two options shared by the finance ministry on Saturday.
But the Centre arrived at the view that if it were to borrow from the market, the result would be higher rates all around as bond yields would harden, a position that was clearly articulated in the finance ministry’s communications to states on Saturday. If the interest rates of government securities were to go up, the cost of any borrowings undertaken by states would also rise. Further, the borrowing costs for the private sector will also go up.
Besides, officials at the Centre argued, by opening a special window to enable states to borrow up to Rs 97,000 crore, the Centre was offering a good rate in addition to cushioning the impact on the market.
The formula the Centre worked out was very precise,, the sources said. The compensation was worked out at a 10% nominal growth (4% inflation). The loss caused by this estimate being drastically lowered works out to Rs 97,000 crore.
The shortfall over and above this is the impact of the Covid-91 situation of force majeure or as Sitharaman called it “an act of god”. Therefore, the terms for financing this part of the Rs 2.35 lakh crore will be different, officials said.
It is also pointed out that the Centre itself is having to bear a higher spending and consequently deficit than was earlier estimated. In the event, it would not be financially sound for the Centre, and in terms of impact, even the states.