Q. With reference to the Net Borrowing Ceiling (NBC), consider the following statements:
1.It refers to limit on borrowing imposed by the central bank for commercial banks.
2.If a government consistently exceeds its Net Borrowing Ceiling (NBC), it may downgrade its credit rating.
3.Net Borrowing Ceiling helps in maintaining fiscal discipline.
How many of the statements given above are correct?
Explanation –
Statement 1 is incorrect. The NBC refers to the maximum amount a government (in the context of states in India) can borrow in a financial year from all sources, including loans from financial institutions, market borrowings, and external loans. It also takes into account the government’s repayment obligations for the same financial year.
Statements 2 and 3 are correct. If a government consistently exceeds its Net Borrowing Ceiling, it may signal a lack of fiscal discipline and raise concerns about the government’s ability to manage its finances responsibly. This could potentially lead to a downgrade in its credit rating, as credit rating agencies consider various factors, including debt levels and fiscal management, when assessing a government’s creditworthiness. The Net Borrowing Ceiling can help maintain fiscal discipline by limiting a government’s borrowing capacity. This encourages the government to prioritize expenditure and revenue generation to stay within its borrowing limits.
Source: Forum IAS
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