Issues with borrowing powers of States

Source: The post Issues with borrowing powers of States has been created, based on the article “States and the Centre’s fetter of ‘net borrowing ceiling’” published in “The Hindu” on 11th November 2024

UPSC Syllabus Topic: GS Paper2- Polity-issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

Context: The article discusses Article 293 of the Indian Constitution, focusing on borrowing powers of States. It highlights Kerala’s challenge to borrowing restrictions imposed by the Centre, arguing that these limits affect fiscal autonomy, cooperative federalism, and balanced financial management.

What is the issue with Kerala’s borrowing limits?

1. In 2023, the central government imposed a Net Borrowing Ceiling (NBC) on Kerala, capping borrowing at 3% of the projected GSDP for FY 2023-24. This limit covers loans from the open market, financial institutions, and State-owned enterprises.
2. Kerala claims this restriction harms its financial position, reducing its ability to fund developmental and welfare activities.
3. The State challenged the NBC in the Supreme Court, arguing that it infringes on its fiscal autonomy under Article 293 of the Constitution.

For detailed information on Kerala’s Protest Against Net Borrowing Ceiling (NBC) read this article here

What are the constitutional provisions related to borrowing?

1. Historical Context:
2. Article 293 is derived from Section 163 of the Government of India Act, 1935.
3. Section 163(4): Prevented the Federation from unreasonably refusing, delaying, or imposing arbitrary conditions on loans.
4. This safeguard was not adopted in the Indian Constitution post-Independence, as a national government replaced the colonial administration.
5. Present Provisions:

Article 292: Allows the Centre to borrow on the security of the Consolidated Fund of India.

Article 293(1): States can borrow within India on the security of their Consolidated Fund.

Article 293(3): Requires Centre’s consent for State borrowings if past loans from the Centre are outstanding.

Article 293(4): Empowers the Centre to impose conditions on States’ borrowing.

For detailed information on Article 292 and 293 of Indian Constitution read Article 1, Article2

How has fiscal discipline evolved in India?

1. FRBM Act, 2003: Established to reinforce financial restraint, setting targets like eliminating revenue shortfall and reducing the fiscal deficit.
2. Fiscal Deficit Targets: Set a cap of 3% of GDP for the Centre’s annual fiscal deficit, aiming to maintain economic stability.
3. State Compliance: States developed their own legislation to align with the Centre’s fiscal deficit limits.
4. FRBM Amendment Act, 2018: Tightened regulations by requiring the central government to keep the fiscal deficit under 3% of GDP and public debt below 60% of GDP, fiscal deficit to below 4.5% of GDP by 2025-26.

What are Kerala’s main arguments in the Supreme Court?

1. Violation of Fiscal Autonomy: Kerala claims the Centre’s borrowing cap of 3% of projected GSDP for FY2023-24restricts its constitutional right under Article 293 to manage finances.
2. Impact on Development: The restrictions hinder Kerala’s ability to fund developmental and welfare projects, worsening its financial position.
3. Arbitrary Conditions: Kerala argues that Article 293(4) grants the Centre excessive powers to impose borrowing conditions without adequate safeguards.

What should be done?

1. Form a Borrowing Commission: Create a commission akin to the Finance Commission, as suggested by Ananthasayanam Ayyangar(in constituent Assembly debate), to address disputes and assess borrowing needs of States and the Centre’s fiscal goals.
2. Adopt Transparency and Consultation: Implement guidelines ensuring transparency in decision-making, equity, and consultations with States before imposing borrowing restrictions, as highlighted in the article.
3. Revisit Historical Safeguards: Consider provisions from Section 163(4) of the Government of India Act, 1935, which discouraged unreasonable delays, conditions, or refusals in borrowing approvals.
4. Strengthen Fiscal Autonomy: Balance borrowing restrictions with developmental needs, as Kerala faces financial challenges under the 3% GSDP borrowing cap for FY2023-24.
5. Ensure Uniform Treatment: Apply borrowing rules equally across all States to uphold cooperative federalism and avoid favoritism

Question for practice:

Discuss the constitutional provisions and challenges related to the borrowing powers of States in India, with a focus on Kerala’s stance against the Net Borrowing Ceiling (NBC).