August 31, 2020
Before the act of god, there was an act of fraud, says Dr Amit Mitra
The Bengal Finance Minister Dr Amit Mitra, during a press conference on Sunday, August 30 slammed the Union finance minister for the fall in GDP even before the COVID-19 pandemic and criticised her for stating that it was an ‘act of god’ and thereby shirking fiscal responsibility.
Throwing States into debt traps
Dr Mitra said that ”in the name of an act of god, huge debts are being thrust upon the States”, and that this was a well-planned strategy of the Centre to ruin federalism and move towards centralism.
He said what the Centre is trying to do is to thrust debts on the States and ruin them financially, and very firmly stated that ”our state is not accepting the Centre’s directives that (the) State can borrow loan”.
Both the Centre’s options untenable
Bengal, which has already rejected the two borrowing options proposed by the Centre for the States, Dr Mitra said, will now take up the matter of GST compensation with other “like-minded State governments”, including BJP-ruled ones. The idea will be to “take the Centre into confidence” regarding the non-feasibility of these new mechanisms.
The two alternative proposals tabled by the Centre for the States to recover their revenue shortfall are: Borrowing the Central government-projected GST shortfall of Rs 97,000 crore through a special window for States, coordinated by the Finance Ministry, which would then be fully repaid by the Centre from the compensation cess fund levied by the States, without it counted as State debt, or borrowing the entire shortfall (total of GST compensation shortfall and COVID-19-related loss of revenue for the states) of Rs 2.35 lakh crore from markets at fair interest rates, facilitated by the Centre and the Reserve Bank of India.
Reasoning why Bengal has rejected the first proposal, the Bengal finance minister said, “What is being proposed by the Centre is tantamount to monetisation of (state) debts through the back door and for the States it is a Catch-22 situation”, because ultimately the States will end up borrowing the remaining shortfall of Rs 1.38 lakh crore as well.
“How will any write-off (of the remaining amount) happen? Ultimately, States will end up borrowing this money too. There is no clarity yet”, he said.
As for the second option proposed by the Centre, he said that it directly pushes up interest burden and debt servicing commitments. Individual States are also likely to face the issue of higher interest rates.
Borrowing limits of State governments, the minister said, continue to be limited under the FRBM Act. As an example, Bengal, even after exhausting its borrowing limit entirely, will face a shortfall of Rs 15,000 crore. And yet, “relaxation of FRBM limits is not being allowed”, he said.
Act of fraud
Dr Mitra said that before demonetisation, India’s GDP was 8 per cent but after demonetisation, it came down to 4 per cent, that is, Rs 6 lakh crore annually.
Criticising the Union finance minister’s referring to COVID-19 as an ‘act of god’ and her stating that therefore the Centre has no responsibility to compensate states for revenue losses due to the pandemic, Dr Mitra said that before the ‘act of god’, an ‘act of fraud’ had taken place – the fraud in GST to the tune of Rs 70.80 crore. He wondered whether, therefore, ”demonetisation and launching of unprepared GST are also acts of god”.
He also questioned the intent of implementation of GST. Referring to the meeting of the Empowered Committee in 2016, where different state finance ministers were present, he said the current ruling party’s representative in the committee, then a leader of the opposition, who later became the Union finance minister, stated, ”I do not trust the UPA government for the implementation of GST”.
‘Implementation’ referred to the decision by the Empowered Committee to compensate states for their loss of revenue (as state taxes would be subsumed by GST) for a period of five years.
“Now”, Dr Mitra said, “it (that trust deficit) has come full circle as the States are saying that we do not trust the Centre”.
Solution: Centre borrows to compensate States
The minister said it is better that the Centre borrows money to compensate states than the States’ borrowing and then getting compensated by the Centre.
He said if the states borrowed money, it would adversely affect their financial health and therefore, it is better for the Centre to borrow money.
Dr Mitra the Reserve Bank of India too prefers the Centre to borrow money because then the former can print money if required.