Borrowing Powers and Related Provisions

Context:

In 2023, the central government imposed a ‘Net Borrowing Ceiling’ (NBC) on Kerala, limiting the maximum borrowing the state can undertake to 3% of its projected Gross State Domestic Product (GSDP) for FY 2023-24. 

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• This NBC covers all borrowing methods, including open market loans, financial institution loans, and liabilities from Kerala’s public account. 
• To prevent states from bypassing this borrowing limit through state-owned enterprises, the ceiling now also includes certain borrowings by these entities.

Impacts on Kerala’s Finances:

• Meeting Expenses: This restriction has severely impacted Kerala’s finances, making it difficult for the state to meet expenses and invest in developmental and welfare projects. 
• Tensions: It has also sparked political and legal tensions between the Centre and the state. 
  • Kerala has approached the Supreme Court, arguing that this measure encroaches on its executive authority under Article 293 of the Indian Constitution, which grants states the power to borrow based on the security of the Consolidated Fund. 
• Fiscal Autonomy: Kerala claims that its fiscal autonomy, as enshrined in the Constitution, has been unlawfully curtailed by the Centre. 
  • This case marks the first time Article 293 has been brought before the Court for interpretation.

Borrowing Powers and Provisions:

• Chapter II of Part XII of the Constitution: It covers the borrowing powers of the Centre and states. 
  • Article 292 allows the central government to borrow against the security of the Consolidated Fund of India, while Article 293 allows state governments to borrow within India based on the state’s Consolidated Fund. 
• Extent of Borrowing: It may be set by laws enacted by Parliament and state legislatures, respectively. 
  • Article 293(2) permits the Centre to lend to states, with terms set by any applicable laws made by Parliament.
• Restrictions: Additionally, Article 293(3) restricts states from borrowing without the Centre’s consent if there are outstanding loans or guarantees previously provided by the Centre. 
  • The Centre has broad discretion over “consent” and may impose any conditions it deems appropriate.

Sources of Article 293:

• GoI Act, 1935: Article 293 is derived from Section 163 of the Government of India Act, 1935. 
  • Section 163(4) of the 1935 Act required that while exercising powers under Section 163(3), the Federation should not unreasonably delay or deny loans or guarantees or impose unreasonable conditions if provinces showed sufficient cause. 
• Constituent Assembly: In debates on Article 293 (formerly draft Article 269), Constituent Assembly member Ananthasayanam Ayyangar highlighted the need for scrutiny of borrowings, as they impose long-term obligations on future generations. 
  • He suggested creating a commission similar to the Finance Commission.
• Disputes: Disputes over such matters would be referred to the Governor-General, whose decision was final. 
  • However, this clause was not included in the Indian Constitution, as it was thought unnecessary after Independence, given the replacement of provinces by state governments and the establishment of a national government at the Centre.

Addressing Revenue Shortfall:

• FRBM Act: To implement Article 292, the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted to ensure financial discipline through goals like eliminating revenue shortfall and reducing fiscal deficit. 
  • The Centre’s fiscal deficit target is set at 3% of GDP, and states have their own fiscal laws in line with this target. 
  • The FRBM Amendment Act, 2018, requires the Centre to keep the fiscal deficit below 3% of GDP and total public debt under 60% of GDP. 
  • The Centre aims to reduce the fiscal deficit to below 4.5% of GDP by 2025–26. 
• Concerns Over Fiscal Autonomy: By capping states’ borrowing limits, the Centre intends to promote fiscal discipline, but this has raised concerns over states’ financial autonomy and their ability to balance their budgets.
• Supreme Court’s Involvement: The Supreme Court is now addressing the issue of states’ borrowing powers under Article 293, as Kerala’s case raises critical questions about fiscal decentralisation, state autonomy, and the Centre’s financial regulations. 
  • The Court has referred this matter to a Constitutional Bench for examination, which will also consider the impact of these fiscal constraints on the Reserve Bank of India’s role in fiscal management.

Revisiting Article 293:

• Given the changing economic, political, and fiscal landscape in India, it may be time to review Article 293 of the Constitution. 
• Section 163(4) of the Government of India Act, 1935 cautioned against unreasonable delays, refusals, or conditions in granting loans by the Centre. 
• A similar provision could be considered to resolve disputes between the Centre and states.

Strengthening Article 293:

• Article 293 could be strengthened in the following ways:
• Establishing a Commission: As Ananthasayanam Ayyangar suggested, a commission similar to the Finance Commission could help resolve disputes related to loan approvals by considering both state finances and the Centre’s fiscal goals.
• Setting Clear Guidelines: Guidelines could ensure transparency when the Centre exercises its powers under Article 293(4). 
  • This balanced framework would support cooperative federalism and prevent arbitrary decisions that could compromise fiscal discipline or impose excessive constraints.
• Transparency in Decision-Making: Establish clear, public procedures for approving or rejecting state borrowing requests.
• Consultation Process: Engage with state governments before imposing any borrowing terms or limits, fostering a cooperative approach.
• Uniform Terms: Apply borrowing terms and restrictions equitably to all states, avoiding any bias.
• Respect for Fiscal Autonomy: Ensure that restrictions are reasonable and do not excessively hinder a state’s financial management.

Adhering to these guidelines would help the Centre exercise its powers under Article 293(4) fairly and transparently, promoting balanced fiscal management and cooperative federalism.