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Borrowing limit of States’ shortened

  • Published
    17th Jun, 2023
Context

The Kerala state government is going to take a move in Supreme Court (SC), against the Central government’s decision to cut down the State’s borrowing limit.

  • The State would be deprived of about ?20,000 crore due to the slashed borrowing limit and revenue deficit grant in 2023-24.

Constitutional provisions:

  • Article 293 in The Constitution deals with the ‘Borrowing by States’.
  • It says:
  • “The executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits, and to the giving of guarantees within such limits, if any, as may be so fixed.”

Why states need Centre’s permission while borrowing?

  • Article 293(3) of the Constitution requires states to obtain the Centre’s consent in order to borrow in case the state is indebted to the Centre over a previous loan.
  • In practice, the Centre has been exercising this power in accordance with the recommendations of the Finance Commission.
  • Every single state is currently indebted to the Centre and thus, all of them require the Centre’s consent in order to borrow.

Fixing the ceiling of borrowing:

  • A fiscal deficit target is normally recommended by the finance commission (appointed for a five-year term) and accepted or changed by the Centre.
  • The base fiscal deficit is typically expressed as a percentage rate that is uniformly applied to all state governments.
  • This is then applied to the Centre's projection of each state's gross state domestic product (GSDP) for a given fiscal year to determine the absolute net borrowing ceiling for that year.
  • The borrowing ceiling established in this manner operates as a mild constraint on the state's fiscal deficit for that year.
  • This ceiling is usually disclosed to the states at the beginning of each fiscal year.

Need for such restrictions:

  • One possible purpose behind conferring this power upon the Centre was to protect its interests in the capacity of a creditor.
  • A broader purpose of ensuring macroeconomic stability is also discernible, since state indebtedness negatively affects the fiscal health of the nation as a whole.

Concerns associated:

  • Can be easily raised, encouraging fiscal irresponsibility
  • Lowers the U.S. credit rating and increases its cost of debt
  • Controversy over whether the debt ceiling is constitutional
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