11th November 2024 (8 Topics)
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, limiting its borrowing capacity to 3% of the projected Gross State Domestic Product (GSDP) for FY 2023-24. This ceiling includes all borrowing avenues, such as open market loans, loans from financial institutions, and liabilities from the public account. Kerala has challenged this move in the Supreme Court, citing encroachment on its fiscal autonomy under Article 293 of the Constitution, leading to a significant legal and political dispute between the Centre and the State.
Borrowing Powers and Constitutional Provisions
- Article 293 of the Constitution: This article empowers States to borrow on the security of the Consolidated Fund of the State. While the Centre can regulate the extent of borrowing by States through law, it cannot arbitrarily restrict their borrowing power.
- Financial Responsibility and Budget Management (FRBM): The FRBM Act, 2003, along with its amendments, imposes a target of 3% of GDP as the fiscal deficit for both the Centre and States. The FRBM aims to curb borrowing to ensure fiscal discipline.
- Kerala’s Legal Challenge: Kerala argues that the Central government's imposition of borrowing restrictions violates the financial autonomy guaranteed under Article 293, undermining its ability to manage its finances effectively.
Implications of the Central Government's Action
- Fiscal Autonomy and Cooperative Federalism: Kerala’s legal battle highlights a key issue regarding fiscal decentralization and the balance of power between the Centre and the States. The imposition of borrowing limits by the Centre could undermine States' fiscal autonomy, hampering their ability to meet expenditure and invest in development.
- Need for a Commission: As suggested by Ananthasayanam Ayyangar, a commission similar to the Finance Commission should be established to examine and determine the borrowing limits of States, considering their financial health and needs.
- Improving Fiscal Framework: There is a call for strengthening the provisions of Article 293 to ensure a more consultative, transparent, and equitable process in the Centre's exercise of borrowing powers, promoting cooperative federalism without arbitrary decision-making.
Practice Question:
Q. The imposition of a Net Borrowing Ceiling (NBC) by the Centre on Kerala has sparked a legal and political dispute regarding the fiscal autonomy of States under Article 293 of the Constitution. Discuss the implications of this issue for the fiscal federalism in India and suggest measures to ensure a balanced fiscal framework between the Centre and States.
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