Kerala’s Protest Against Net Borrowing Ceiling (NBC)-The Severe Erosion of Fiscal Federalism

Source: The post Kerala’s protest agai

nst Net Borrowing Ceiling (NBC) has been created, based on the article “The severe erosion of fiscal federalism” published in “The Hindu” on 7th February 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.

News: The article discusses Kerala’s protest against the Indian Central Government’s Net Borrowing Ceiling (NBC), which limits the state’s borrowing capacity. This restriction impacts Kerala’s ability to fund pensions and welfare schemes, leading to claims that it violates the Constitution, prompting legal challenges. Kerala’s Protest Against Net Borrowing Ceiling (NBC)-The Severe Erosion of Fiscal Federalism

What is The Net Borrowing Ceiling (NBC)?

The Net Borrowing Ceiling (NBC) restricts state borrowings from various sources, such as the open market. To determine this ceiling, the Central Government subtracts state liabilities, including those from public accounts.
Additionally, borrowings by state-owned enterprises, where the principal and/or interest are serviced out of the Budget, or through assignment of taxes or cess or any other State revenue, are also deducted from the NBC.

What are the Arguments of The Central Government and Kerala for NBC?

Central Government’s Arguments for NBC:

Relies on Article 293(3) of the Constitution, requiring state consent for loans with outstanding central loans.

Justifies NBC to ensure fiscal discipline and transparency, as recommended by the 15th Finance Commission Report.

Includes state enterprise debts in NBC to prevent off-budget transactions and hidden liabilities.

Kerala’s Arguments Against NBC:

Contends that including state enterprise debts, like those of KIIFB, in NBC is constitutionally suspect.

Notes that the 15th Finance Commission Report does not specifically recommend including state enterprise debts in NBC.

Highlights Article 266(2) to argue that public account transactions are under state jurisdiction, questioning their inclusion in NBC calculations.

Emphasizes the Kerala Fiscal Responsibility Act, 2003, arguing that it already ensures fiscal discipline, questioning the need for central intervention.

References Article 202 of the Constitution and Entry 43 of the State List, asserting state control over its public debt and financial affairs, challenging the central imposition of NBC.

What are The Implications of NBC?

Restricts State Borrowing: The NBC constrains states’ borrowing capacity, impacting their financial independence.

Impacts Infrastructure: Kerala’s inclusion of KIIFB debts under NBC limits funding for critical infrastructure projects.

Affects Essential Services: NBC’s borrowing restrictions challenge states’ ability to fund pensions and welfare schemes.

Fiscal Federalism Concerns: Kerala perceives NBC as an example of ‘annihilative federalism’, undermining state autonomy and altering India’s federal balance.

Legal Disputes: Kerala’s Supreme Court challenge against NBC underscores constitutional tensions regarding fiscal authority between the Centre and states

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Way forward

A balanced approach is essential, where fiscal discipline and state autonomy are both respected. Reassessing the scope of NBC, in line with the 15th Finance Commission’s recommendations, becomes crucial. This ensures states like Kerala can effectively manage their finances, uphold constitutional norms, and maintain the spirit of cooperative federalism.

Question for practice:

Evaluate the arguments presented by both the Central Government and Kerala regarding the Net Borrowing Ceiling (NBC).