The central government today announced to borrow Rs. 1.1 lakh crore to fund Goods and Services Tax shortfalls of the state governments. The decision means that the centre has relented under the pressure from the non- BJP state governments that the Finance Ministry should borrow on their behalf. Centre will borrow under the special window to meet the shortfall of GST compensation.

In an announcement made on Twitter, finance ministry wrote, "Under the Special Window, the estimated shortfall of Rs 1.1 lakh crore (assuming all States join) will be borrowed by Government of India in appropriate tranches."

What does it mean to the state governments?

The announcement would mean that state governments would not be forced to borrow funds to finance the shortfall aroused out of multiple reasons including lower than expected revenue and lockdown. Ever since its roll-out, revenue collection through GST has been sluggish and strict lockdown due to COVID-19 pandemic further dented the government exchequer severely.

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An Indian consumer goods trader shows letters GST representing 'Goods and Services Tax' (GST)at his shop in Hyderabad NOAH SEELAM/AFP/Getty Images

The successive meetings of GST council went inconclusive as non-BJP states were reluctant on centre borrowing and then compensating the state governments. Instead, the Ministry of Finance gave two options to states to meet their GST compensation requirements. Under Option 1, the central government had mooted a special borrowing window from the Reserve Bank of India (RBI) for GST-related compensation.

As per the centre's measurement, the collective amount stands at Rs 97,000 crore. Under Option 2, the states can borrow a greater sum of Rs 2.35 lakh crore from the market. The latter option also takes into consideration the short arouse due to the COVID related shortfall.

Former FM Chidambaram welcomes the move

Former Finance Minister P Chidambaram has welcomed the government. In a tweet, the Congress leader wrote, "If the Centre has decided to borrow Rs 1.1 lakh crore and extend it to the states as a back-to-loans, I welcome the change of position. I thank all the economists, academics and newspaper editors who had supported our position."