After failing to strike a consensus over GST compensation borrowings, the Centre finally relented late on Thursday evening and agreed to raise a loan from the market and pass it on to states to compensate for their GST shortfall.
The finance ministry said the Centre will borrow an estimated Rs 1.1 lakh crore to meet the states' GST shortfall.
The government, which took the decision after the market hours, said the general government borrowing will not increase with this move.
Only two days ago, Finance Minister Nirmala Sitharaman had said that if Centre borrows on behalf of the states, it will "jack up" the borrowing cost for all other stakeholders in the market.
Sources said the Centre’s reluctance to borrow would have cost the government dearly as Assembly elections in Kerala and West Bengal, two major Opposition-ruled states, are due next year. These two states opposed the Centre’s borrowing plan vehemently and Kerala was also toying with an idea of moving the Supreme Court on the issue.
"It may be clarified that the general government (states+Centre) will not increase by this step," the finance ministry said.
The borrowing will not have any impact on the fiscal deficit of the Centre as the amounts will be reflected as the capital receipts of the state governments, the ministry said.
The Centre in August gave two options to the states to borrow either Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from the market and had also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.
Following a demand by some states, the amount of Rs 97,000 crore was increased to Rs 1.10 lakh crore.
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