1. GST council meeting:

Union Finance Minister, after the 41st GST Council meeting, proposed two options to states to resolve the issue of compensation cess shortfall under the GST regime.

Distinction in shortfall

1. Pending payment– GST compensation payments to states have been pending since April, with the pending amount for April-July estimated at Rs 1.5 lakh crore.
2. GST revenue gap– The GST compensation requirement is estimated to be around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore – an estimated compensation shortfall of Rs 2.35 lakh crore

GST [Compensation to States] Act, 2017

• States are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22).
• The compensation is calculated based on the difference between the states’ current GST revenue and the protected revenue after estimating an annualized 14% growth rate from the base year of 2015-16.

Outcome of the 8th GST council meeting

• In case the amount in the GST Compensation Fund fell short of the compensation payable, the GST Council shall decide the mode of raising additional resources(including borrowing from the market). It could be repaid by collection of cess in the sixth year or further subsequent years.

Challenges for the Centre

1. Borrowing challenge-

• Hike in interest rate– Borrowings by the Centre would push up the bond yield rates, which in turn would push up the bond yield of the states setting off a spiral leading to hike in the interest rates for businesses and individuals.
• Borrowing limit-The Centre has already breached the budgeted borrowing limits for the current year in the first four months.

2. According to Attorney general statement-Compensation gap cannot be bridged using the Consolidated Fund of India [CFI].

Options made by the Centre

Option 1 –

• To provide a special borrowing window to states, in consultation with the RBI, to provide Rs 97,000 crore at a “reasonable” interest rate and this money can then be repaid after 5 years by extending cess collection.
• A 0.5 percent relaxation in the borrowing limit under the Fiscal Responsibility and Budget Management [FRBM] Act would be provided.

Option 2–

• To meet the entire GST compensation gap of Rs 2.35 lakh crore this year itself after consulting with the RBI.
• No Fiscal Responsibility and Budget Management Act relaxation has been mentioned for this option.

Possible solution-

1. Low borrowing rate for the States-The single window under option-1 being arranged by the Centre and the entire debt being serviced from future cess receipts will ensure that the cost remains close to the G-sec rate.
2. Attorney General suggestion– Compensation cess levy can be extended beyond 5 years, to meet the shortfall.

Way forward

Center needs to renege on its promise to find ways to compensate the state for loss of revenue. States should come forward and work with the Centre in the true spirit of cooperative federalism that the Council has come to be known for these past few years

2. India-China conflict

Government need to create a new equilibrium in its future relations with neighbours, including China.

What are the reasons for current tension between India-China?

1. Non-demarcated border– The root cause lies in an ill-defined, 3,440 km (2,100 mile) long border that both countries dispute.
2. Strong infrastructure buildup near border– The two nations are also competing to build infrastructure along the border. India’s construction of a new road to a high- altitude air base is seen as one of the main triggers for border tension.
3. China’s fear-

• India’s tilt toward United States amid US-China tensions.
• China views India’s assertions regarding Gilgit- Baltistan, as an implicit attack on the China-Pakistan Economic Corridor (CPEC), China’s flagship programme.
• Political and economic tension within China due to COVID- 19 pandemic.
• India being a growing power in Asian region.
• Potential threat to Chinese cultural hegemony in Tibet, because of the presence of the Dalai Lama in India.

What are the challenges that lie ahead of India?

1. Severe winter–

• The administrative challenge of maintaining troop accretions at this altitude, during the winter season, will be of serious concern.
• The armed forces need to ensure a high state of “operational readiness” until the onset of the severe winter.

2. Political- diplomatic initiative–

• 1st challenge is to ensure that the current standoff is resolved without conflict. But in case of conflict, it must be localized to the Ladakh region.
• It is important to ensure that the country is not faced with a “two-front conflict” [with China and Pakistan].

What has been Indian response to Chinese dilemma?

1. Military– India has moved in additional divisions, tanks and artillery across the LAC to match Chinese deployments.
2. Economic-

• Citing the emergent nature of threats from mobile applications, the government has banned more than 200 Chinese applications.
• Recently, the Indian government tightened FDI norms coming from the countries which share land borders with India. Government approval has been made mandatory.

3. Foreign pressure– India must ensure continued US and international pressure at China’s other pain points like the South China Sea, Taiwan, Hong Kong and Tibet.
4. Isolating china– Need to continue to isolate China on its insidious role in starting the current pandemic.
5. Reinforcing the alliance– India need to strengthen the Quad and other multilateral regional groupings of like-minded countries.
6. Reworking on bilateral agreement– The need is to insist with an unequivocal “no war pact” with China and a categorical, time-bound resolution of all border issues.

Way forward

The first priority has to be to restore the status quo ante at the border as it existed in April. India needs a new paradigm of foreign policy which safeguard India’s interests more assertively and where all options can be exercised. Resolving this conundrum will require not routine political guidance but great statesmanship on both sides.

3. India, China agree on 5-point plan to de-escalate LAC stand-off

Five Points:

• India and China should take guidance from the consensus of the leaders on developing India-China relations including not allowing differences to become disputes.
• The current situation in the border areas is not in the interest of either side and therefore the border troops of both sides should continue their dialogue, quickly disengage, maintain proper distance and ease tensions.
• The two sides shall abide by all the existing agreements and protocols on China-India boundary affairs and maintain peace and tranquillity in the border areas and avoid any action that could escalate matters.
• The two sides will continue communications through the Special Representatives mechanism and meetings of the Working Mechanism for Consultation and Coordination on border affairs will continue.
• As the situation eases, the two sides should expedite work to conclude new confidence-building measures to maintain and enhance peace and tranquillity in the border areas