For the second year in a row, the government is borrowing under a special, relatively low-cost mechanism to bridge a yawning shortfall in the GST compensation cess pool and transfer the funds to states as back-to-back loans. To help accelerate capital expenditure by state governments, the Union government on Thursday released Rs 44,000 crore to them to bridge their GST revenue shortfall. With this, the target of releasing Rs 1.59 lakh crore under the special back-to-back loan mechanism for the current financial year has been met. Of course, this amount is additional to what the states get as compensation from the designated cess funds. The Centre had released Rs 75,000 crore as GST compensation to states on July 15 and another Rs 40,000 crore on October 7 to make available more liquidity to them. These back-to-back loans entail no significant fiscal cost to the states. The front-loading of GST compensation loans will not lead to additional market borrowing by the Centre. Robust revenue receipts are giving the Centre confidence to limit its annual market borrowing programme at the budgeted level of Rs 12.05 lakh crore for FY22 even after factoring in Rs 1.59 lakh crore borrowings to be undertaken by the Centre for GST compensation to states Even with the relief packages and export subsidy arrears clearances announced recently, the fiscal cost of which is estimated at around Rs 2 lakh crore, the fiscal deficit target of 6.8% of GDP for 2021-22 could be adhered to, given that tax revenue receipts would likely exceed the budget estimate by about Rs 2 lakh crore and expenditure rationalisation undertaken might allow savings of around Rs 1 lakh crore. Of the Rs 44,000 crore compensation released in the latest tranche, Karnataka will get the largest amount of (Rs 5,011 crore), followed by Maharashtra (Rs 3,814 crore), Gujarat (Rs 3,609 crore) and Punjab (Rs 3,357 crore). Aided by impressive growth in tax revenues, capital expenditure by state governments have shown a marked improvement in the first five months of the current financial year even as the advantage of low base has begun to peter out. Data gathered by FE of 20 major states showed that these states reported combined capex of Rs 1.21 lakh crore in April-August of FY22, up 70% on year compared with a decline of 35% on year in the corresponding period of FY21. These states’ capex in April-August in the current fiscal year was 10% higher compared with the same in the corresponding period of the pre-pandemic year, FY20. The Centre has asked states to undertake Rs 1.1 lakh crore more capex in FY22 than Rs 5 lakh crore achieved in the pre-pandemic year of FY20. The states are allowed net borrowing of 4% of GSDP in FY22 with 50 basis points of this linked to the achievement of incremental capex over their investment in FY20. For the second year in a row, the government is borrowing under a special, relatively low-cost mechanism to bridge a yawning shortfall in the GST compensation cess pool and transfer the funds to states as back-to-back loans. While the amount borrowed under the RBI-enabled mechanism last year was Rs 1.1 lakh crore, the Centre acknowledged in Parliament that an amount of Rs 81,179 crore was yet to be released to the state governments towards fully compensating them for their GST revenue shortfall for FY21.