States and The Centre’s Fetter of Net Borrowing Ceiling

Context

• In 2023, the central government imposed a Net Borrowing Ceiling (NBC) on the State of Kerala, restricting its maximum borrowing to 3% of the projected Gross State Domestic Product (GSDP) for FY 2023-24.
• This ceiling applies to all borrowing avenues, including open market loans, loans from financial institutions, and liabilities from the public account of the State.
• The measure aims to prevent states from circumventing borrowing limits through state-owned enterprises.

Impact on Early

• The NBC has significantly impacted Kerala’s financial position, making it challenging for the state to meet its expenditure needs.
• The restriction has hindered investments in developmental and welfare activities, leading to political and legal controversies between the central and state governments.
• Legal Action:
  • Kerala has approached the Supreme Court of India, arguing that the central government’s actions infringe upon its fiscal autonomy guaranteed under Article 293 of the Constitution.
  • This case marks a historic interpretation of Article 293 regarding borrowing powers, which allows states to borrow against their Consolidated Fund.

Constitutional Framework of Borrowing Powers

• Article 292: Grants the central government the authority to borrow on the Consolidated Fund of India.
• Article 293: Allows State governments to borrow within India on their Consolidated Fund, subject to any borrowing limits set by the State legislature.
  • Article 293(3) imposes conditions on States with outstanding loans or guarantees from the central government, requiring central approval for new loans.
  • Article 293(4) gives the central government broad discretion in imposing terms on these loans.

Historical Context and Missing Clause

• The borrowing provisions in Article 293 originated from Section 163 of the Government of India Act, 1935.
• The original clause under Section 163(4) specified that the central authority should not unreasonably delay or impose excessive conditions when granting loans.
• However, this clause was excluded from the Indian Constitution as it was assumed a national central government would not unduly restrict States.

Fiscal Responsibility and Budget Management (FRBM) Act

• The FRBM Act (2003) set fiscal targets for the central government and required States to establish their own deficit control laws.
• A 2018 amendment further limited the fiscal deficit to 3% of GDP, aiming to reduce it to below 4.5% by 2025-26.
• The restrictions on State borrowing, driven by the central government’s fiscal goals, have raised concerns about States’ fiscal autonomy.

Suggestions for Strengthening Article 293

• Independent Commission: Establish a commission similar to the Finance Commission to assess and mediate borrowing issues, considering both State finances and the Centre’s fiscal consolidation goals.
• Guidelines for Exercising Central Powers under Article 293(4):
  • Transparency: Ensure public transparency in the criteria for accepting or rejecting State borrowing requests.
  • Consultative Process: Involve States in discussions before imposing borrowing terms, promoting a cooperative approach.
  • Equitable Treatment: Apply uniform terms for all States to avoid discrimination.
  • Fiscal Autonomy: Preserve States’ financial independence by ensuring that borrowing restrictions are reasonable and do not overly constrain States’ fiscal management capabilities.

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