Context

The Centre permitted five states to go for additional borrowing of ?9,913 crore through Open Market Borrowings (OMBs) to meet their expenditure requirements amid falling revenues due to the COVID-19 crisis.

About

What are Open Market Operations?

• OMOs are the market operations conducted by the RBI by way of sale/ purchase of G-Secs to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
  • A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments.
  • It acknowledges the Government’s debt obligation.
  • Such securities are
    • short term (usually called treasury bills, with original maturities of less than one year) or;
    • long term (usually called Government bonds or dated securities with original maturity of one year or more)
  • In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
  • G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
• When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
• Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

Key-highlights

• These five states are Andhra Pradesh, Telangana, Goa, Karnataka and Tripura. 
• The permission has been accorded after these states successfully met the reform condition of implementation of 'One Nation One Ration Card' system.

The recent raise In May this year, the government raised the net borrowing limit for state governments from 3% of G-SDP to 5% to make available an additional Rs 4.28 lakh crore to all the states combined. While 0.5 percentage point of the extra borrowing window will be available to all states unconditionally, 1 pps will be made available in four equal tranches with each to clearly “specified, measurable and feasible reform actions”. The balance 0.5 pps can be accessed if milestones are ‘completely achieved’ in at least three out of four reform areas. The reform linkage will be in four areas – universalisation of ‘One Nation One Ration Card’ ease of doing business power distribution augmentation of urban local body revenues

The constitutional framework

• A state government can borrow within India (not abroad) upon the security of the Consolidated Fund of the State.
• 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.
• Every single state is currently indebted to the Centre and thus, all of them require the Centre’s consent in order to borrow.
• In practice, the Centre has been exercising this power in accordance with the recommendations of the Finance Commission.
• This consent can also be granted subject to certain conditions by virtue of Article 293(4). This is the source of the power exercised by the Centre in the present instance.

Origin of Article 293: The origin of Article 293 in its current form can be traced to Section 163 of the Government of India Act, 1935. However, the colonial law expressly stated that the Centre shall not seek to impose “any condition which is unreasonable”. If a dispute were to arise regarding any condition, the matter had to be referred to the Governor-General, who would take a final decision.