The Central Government released ₹44,000 crore to States and Union Territories on Thursday as back-to-back loans in lieu of their GST compensation dues, thus completing the transfer of ₹1.59 lakh crore estimated compensation shortfall through this mechanism this financial year.
The early disbursal of GST compensation dues this year, with five months still remaining in the financial year, will help States manage their finances better, compared to 2020-21 when ₹1.1 lakh crore was transferred to States in smaller instalments till the latter half of the year. This year’s estimated GST compensation shortfall has been released in three tranches — ₹75,000 crore on July 15, ₹40,000 crore on October 7 and the latest payout of ₹44,000 crore.
The Finance Ministry said the ₹1.59 lakh crore would be over and above the compensation in excess of ₹1 lakh crore, estimated to be released to States and Union Territories during this financial year, based on actual cess collections. Those funds accruing as “normal GST compensation” are released every two months.
“The sum total of ₹2.59 lakh crore is expected to exceed the amount of GST compensation accruing in FY 2021-22,” it added, indicating this may make up for some of the compensation shortfall still pending for 2020-21.
“It is expected that this release will help the States and Union Territories in planning their public expenditure among other things, for improving health infrastructure and taking up infrastructure projects,” the Ministry said, emphasising that the release of funds was “frontloaded” as States have a very important role to play in effectively managing the COVID-19 pandemic and stepping up capital expenditure.
ICRA chief economist Aditi Nayar said the early release of the GST compensation loans will help States avoid a bunching up of spending plans towards the end of the year and should help to compress the size of the State Development loan auctions in the immediate term leading to a modest cooling of bond yields.
“One-third of the loan amount has been provided to just four States, namely Karnataka, Maharashtra, Gujarat and Punjab. This highlights the looming structural shock faced by those states with a high dependence on GST compensation, after the original transition and compensation period of five years ends,” Ms. Nayar said.