Government may borrow Rs 40k crore as cash-strapped states seek funds
The government may borrow about Rs 40,000 crore to compensate cash-strapped states for their revenue shortfall under the Goods and Services Tax (GST) regime, and push its departments and public sector firms to clear their vendors’ dues , to rescue them from an acute liquidity crunch caused by the 21-day coronavirus lockdown, three officials aware of the developments said. Apart from states, government departments also owe money to companies across sectors for products bought, services rendered, or such things as subsidies.
In a meeting with the Prime Minister Narendra Modi though video conference on Thursday, several state chief ministers demanded that the Centre pay their GST compensation, immediately release the wages of workers enrolled under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and sought help in Coronavirus relief efforts. The government is considering their proposals, the three officials said.
The cabinet secretariat and the department of expenditure are continuously monitoring the situation so that the states do not face a funding crunch in fighting the coronavirus pandemic and companies, particularly micro, small and medium enterprise (MSME), receive their dues in time to tide over the crisis, the officials said on condition of anonymity.
Several states have cited a funding crunch and announced salary cuts for their employees for March.Industry, particularly the MSME sector, has asked for the speedy release of outstanding payments by government agencies.
“The expenditure secretary has told all ministries and CPSEs (central public sector enterprises) not to sit on vendors’ money and clear their dues expeditiously,” one of the officials with direct knowledge of the matter said.
An official in the West Bengal government said the Centre must pay the entire compensation amount due to the states at this crucial juncture to meet their Covid-19 expenses. Punjab has asked for the release of Rs 6,752.83 crore in GST arrears immediately; the payment has been pending since October , 2019.
A recent report on Covid-19 prepared by the Federation of Indian Chambers of Commerce and Industry (Ficci) also asked the Centre provide liquidity to states by increasing the overdraft facility available to them from the Reserve Bank of India (RBI) and pay pending GST compensation immediately.
According to the Union government officials mentioned above, the total compensation payout ito the states n 2019-20 is expected to be over Rs 1.20 lakh crore while total collection from GST compensation cess was less than Rs 80,000 crore. “The government will put up a proposal to the GST Council to borrow from the market to pay compensation to states,” the second official said.
The GST law assures the states a 14% increase in their revenue for five years and the Centre is committed to meeting any shortfall in revenue through the cess levied on luxury goods and sin products such as liquor, cigarettes and other tobacco products.
Most of the states asked the Centre to relax their borrowing limits,and demanded an additional grant in the aftermath of Covid-19 and advance wage payments to MGNREGS workers. Bihar chief minister Nitish Kumar requested the Union government to consider raising the fiscal deficit limit for the state to tide over the emergency. A similar demand also came from the Punjab and Rajasthan governments. The states’ current fiscal deficit limit stands at 3 % of Gross State Domestic Product (GSDP).
West Bengal has demanded a grant of Rs 25,000 crore to fight the Coronavirus disease pandemic, besides kits to fight the virus, such as face masks, gloves, sanitizers and protective suits for medical staff. It also demanded that the Centre release Rs 36,000 crore under different accounts that had not been released earlier.
“...to uphold the spirit of cooperative federalism, we need this minimum help from the central government to cope with the unprecedented impasse at this hour to fight against the Covid-19 pandemic,” chief minister Mamata Banerjee wrote to the Prime Minister on Wednesday. She did not take part in the video conference with PM Modi on Thursday.
Maharashtra chief minister Uddhav Thackeray sought the release of GST compensation worth Rs 16,000 crore. The state government also sought help with procurement and manufacturing of personal protective equipment (PPE) kits and N-95 masks, a government statement said.
Punjab also demanded payment of 15 days’ unemployment allowance per month for three months to mitigate rural distress on account of the national lockdown, suggesting a 90:10 centre-state sharing for these. It asked for a special insurance package for fronline workers such as the police and sanitary workers.
Rajasthan demanded Rs 1 lakh crore from the Centre to fight Covid-19. In a statement after the video conference with the PM, Rajasthan chief minister Ashok Gehlot said he had requested for a relief package and asked for an enhancement of the state’s borrowing limit.
Gehlot requested an inter-state supply chain protocol for essential items, medicines and medical equipment, advance payment of wages to registered and active MNREGS workers and demanded cancellation of payment of interest to the Reserve Bank of India (RBI) and other central financial institutions. Some CMs including Thackeray also demanded immediate distribution of Coronavirus safety equipment and testing kits.
Odisha chief minister Naveen Patnaik did not present any wish-list in the video conference with PM Modi, but he wrote to him earlier this week demanding unemployment allowance to 3.61 million active MGNREGS workers in the state for the lockdown period of 21 days. He requested the Centre to allow the state government to utilise Rs 380.39 crore from the MNREGS fund to provide the unemployment allowance for 21 days.
Chhattisgarh chief minister Bhupesh Baghel in a letter to PM Modi on Wednesday demanded the allocation of a special relief package for labourers under MGNREGS. He also requested a support of Rs 750 per month to all Jan-Dhan account holders for the next three months. Under a relief package announced last week, the government will pay Rs 500 a month for three months to women who hold Jan Dhan accounts.
The Union government has also received industry requests to release payments that are due to private sector units.
According to an industry estimate, the outstanding payments to companies run into lakhs of crores. The Associated Chambers of Commerce and Industry of India (Assocham) estimated payments owed by state distribution companies to power generation units at Rs 90,000 crore. In the delayed payments monitoring portal MSME Samadhaan, only 14% of the Rs 3,774.36 crore (against 11,619 claims) filed by MSMEs have been settled so far, it said.
Assocham president Niranjan Hiranandani said the payment delays had created a massive liquidity crunch in two ways: “One, government is taking over all the cheap borrowing in the system (though inadequate), and two, they do not release cash flow to vendors – so the liquidity crisis has exacerbated. MSMEs struggle to cover the financial shortfall created by delayed payments, owing to the high cost of borrowing and this often creates viability issues.”
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