The Reserve Bank of India (RBI) is likely to prefer that the Centre borrows and gives money to the states toward goods and services tax (GST) compensation, avoiding the proposed special mechanism for borrowing that would amount to monetisation.
The Centre has proposed two mechanisms to meet the GST compensation shortfall, one of which is through a Rs 97,000 crore central bank window. The second option is that states borrow Rs 2.35 lakh crore the total estimated GST revenue loss due to the Covid-induced slowdown and the GST transition from markets, facilitated by the Centre and the RBI.
The Centre is yet to circulate a formal proposal on the borrowing plan to the states that was presented to them at Thursday’s GST Council meeting. An analyst said individual states may face the issue of higher interest rates than the Centre if they go to market.
Any monetisation by the RBI reverses an important reform and would set a precedent. The government has held preliminary discussions with the RBI on the options offered to states, said a person familiar with the development.