Daily Editorial Analysis

States and the Centre’s Fetter of ‘Net Borrowing Ceiling’ (GS Paper 2, Polity)

Context

• The Net Borrowing Ceiling (NBC) imposed by the central government in 2023 on the State of Kerala has sparked a legal and political controversy, highlighting the need to revisit Article 293 of the Indian Constitution.
• Kerala has challenged this restriction, claiming that it infringes upon the state’s fiscal autonomy and constitutional borrowing powers.

Introduction

• In 2023, the Centre imposed a Net Borrowing Ceiling (NBC) on Kerala, limiting its borrowing capacity to 3% of the state’s Gross State Domestic Product (GSDP) for FY 2023-24.
• This ceiling includes not only the state’s borrowing from open market loans and financial institutions but also borrowings by state-owned enterprises.
• To prevent states from bypassing these limits through their public enterprises, the ceiling was extended to their borrowings as well.
• The ceiling has created significant financial challenges for Kerala, limiting its ability to meet expenditure needs and curtailing investments in developmental and welfare programs.
• This restriction has led to a political and legal dispute between Kerala and the Centre, with Kerala arguing that it impinges on the state’s constitutional right to borrow for its own financial needs.

Borrowing Powers and Constitutional Provisions

The Constitution of India provides specific provisions regarding the borrowing powers of both the Centre and the States:

• Article 292: This empowers the Central Government to borrow money on the security of the Consolidated Fund of India.
• Article 293: This grants the State Governments the authority to borrow money within India on the security of the Consolidated Fund of the State. However, this power is subject to certain restrictions:
  1. Article 293(2): The central government can impose conditions on the borrowing of states through a law made by Parliament, subject to limits fixed by the Centre under Article 292.
  2. Article 293(3): If a state has outstanding loans or guarantees from the Centre, the central government’s consent is required for the state to borrow further, often with conditions attached.

The central government has considerable discretion in this regard, and it can impose limits or conditions on borrowing by states. However, the scope of this power and its impact on fiscal autonomy have come into question in recent years.

Historical Significance of Article 293

• Article 293 traces its origins to Section 163 of the Government of India Act, 1935, which provided borrowing powers to both the central and provincial governments.
• During the Constituent Assembly debates of August 10, 1949, Ananthasayanam Ayyangar raised concerns about the long-term financial burdens of borrowing and suggested the creation of a commission to scrutinize borrowing powers—much like the Finance Commission.
• However, the provision was not adopted in its entirety, as it was felt that post-independence, the states would be able to manage their borrowing autonomy more effectively under a unified central government.
• Despite this, the need for a balanced approach to state borrowing powers remains.

Fiscal Consolidation and Impact on State Autonomy

• To manage the fiscal deficit and curb borrowing excesses, the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted, setting goals like reducing fiscal deficit and curbing revenue shortfalls.
• Under this framework, the Centre’s fiscal deficit was capped at 3% of GDP, and states also adopted similar measures to manage their deficits.
• In 2018, the FRBM Amendment Act further restricted both central and state deficits, requiring a reduction in public debt to below 60% of GDP by 2025-26.
• However, critics argue that the Centre’s imposition of borrowing limits on states without considering their unique fiscal positions undermines state autonomy and restricts their ability to manage their budgets effectively, thus curtailing their capacity to meet urgent expenditure and invest in development.

Supreme Court Case on Borrowing Powers

• The Kerala State case challenges the imposition of the NBC as a violation of its constitutional right to borrow under Article 293.
• The issue of state borrowing powers, as guaranteed by the Constitution, has never been judicially interpreted until now, making this case significant.
• The Supreme Court has referred the matter to a Constitution Bench to address the key questions related to fiscal decentralization, state fiscal autonomy, and the imposition of fiscal regulations by the Centre.

Why There is a Need to Revisit Article 293

Given the evolving economic, political, and fiscal environment in India, there is a growing call to revisit Article 293 of the Constitution. Key reasons include:

• Section 163(4) of the Government of India Act, 1935 warned against the unnecessary refusal or delay in granting loans by the Centre, especially when sufficient cause is shown by the states.
• There is a need for a more transparent, fair, and balanced approach to borrowing powers, which recognizes both the fiscal constraints of the Centre and the financial needs of the states.

Strengthening Article 293

To address the concerns raised by Kerala and other states, Article 293 could be strengthened in the following ways:

• Establishment of a Commission: Following Ananthasayanam Ayyangar’s suggestion, a commission akin to the Finance Commission could be set up to address disputes related to borrowing powers. This commission would consider both the financial health of the states and the Centre’s fiscal goals.
• Clear Guidelines for Borrowing: There is a need for clear and uniform guidelines regarding the conditions under which states can borrow money. These guidelines would promote cooperative federalism and ensure that fiscal discipline is maintained without undermining state autonomy.
  1. Transparency in decision-making: Clear procedures should be established for the Centre to accept or reject state borrowings, making the process more transparent and accountable.
  2. Consultative process: States should be consulted before any borrowing restrictions are imposed, promoting a more cooperative relationship between the Centre and the states.
  3. Equitable treatment: Borrowing terms should be applied uniformly to all states to avoid prejudice or favoritism.
  4. Fiscal autonomy: States must have the autonomy to manage their finances without undue restrictions, ensuring that borrowing conditions are reasonable and do not excessively hamper fiscal management.

Conclusion

• The imposition of a Net Borrowing Ceiling on states like Kerala has raised important questions about fiscal autonomy and the balance of power between the Centre and the states.
• Reconsidering Article 293 of the Constitution is essential to ensure that states have the financial flexibility they need to meet their expenditure needs, invest in development, and manage their fiscal health while adhering to national fiscal goals.
• A transparent, consultative, and equitable approach to state borrowing powers will help maintain a balance between fiscal discipline and state autonomy, ensuring that both the Centre and states can work together to strengthen India’s federal structure.