In News:

• In 2023, the central government imposed a Net Borrowing Ceiling (NBC) on Kerala, limiting its borrowing capacity to 3% of the projected Gross State Domestic Product (GSDP) for the fiscal year 2023-24.
• Impact on Kerala’s Finances: This ceiling has significantly impacted Kerala’s ability to meet its expenditure needs and fund developmental activities, triggering political and legal disputes. Kerala has approached the Supreme Court of India, arguing that the imposition of NBC infringes upon its constitutional rights under Article 293 of the Indian Constitution.

Constitutional Provisions on Borrowing Powers

Article 292: Borrowing Powers of the Centre

• Central Government’s Borrowing: Article 292 grants the Central Government the authority to borrow money on the security of the Consolidated Fund of India.
• Limits on Borrowing: The extent of borrowing by the Centre is determined by laws enacted by Parliament.

Article 293: Borrowing Powers of the States

• State Borrowing: Article 293 allows State Governments to borrow within India against the Consolidated Fund of the State. However, it imposes certain conditions:
  • If a State has outstanding loans or guarantees given by the Centre, the Centre’s consent is required to raise further loans.
  • The Central government can impose conditions when granting such consent.

Centre’s Role in State Borrowing

• Article 293(3) allows the Centre to impose conditions on a state’s borrowing if it has existing liabilities or guarantees outstanding.
• The Centre has wide discretion in granting or denying consent, which has been a point of contention in Kerala’s case.

The Imposition of Net Borrowing Ceiling (NBC)

Scope of the NBC

• Comprehensive Coverage: The NBC encompasses all borrowing avenues, including open market loans, loans from financial institutions, and liabilities from State public accounts. To curb circumventing of the borrowing cap via State-owned enterprises, the NBC also covers borrowings by these entities.

Purpose of NBC

• Fiscal Discipline: The NBC is designed to regulate borrowing and prevent states from accumulating unsustainable levels of debt, thus ensuring financial stability.
• Transparency: By including all borrowing avenues, including off-budget borrowings by state-owned enterprises, the NBC aims to provide a clearer picture of a state’s financial health.

Arguments for the NBC

• Macroeconomic Stability: The NBC helps maintain macroeconomic stability by controlling the borrowing levels of states, thus protecting the national economy.
• Compliance with FRBM Act: The NBC aligns with the Fiscal Responsibility and Budget Management (FRBM) Act, aiming to keep the fiscal deficit within prescribed limits.
• Equitable Resource Distribution: The NBC ensures that wealthier states do not disproportionately borrow, thus promoting balanced regional development.

Arguments Against the NBC

• Erosion of Fiscal Autonomy: Critics argue that the NBC undermines the fiscal autonomy of states, as guaranteed by Article 293, by restricting their ability to make independent financial decisions.
• Impact on Developmental Activities: States, particularly Kerala, contend that the borrowing cap restricts their ability to fund key infrastructure projects and social welfare activities.
• Legal Concerns: The NBC’s impact on the interpretation of Article 293 raises legal questions regarding the extent of the Centre’s authority over state borrowing powers.

Fiscal Responsibility and Budget Management (FRBM) Act

Overview of the FRBM Act

• Objective: The FRBM Act, 2003 was enacted to promote fiscal discipline and ensure long-term financial stability in India.
• Key Features:
  • Targets a 3% fiscal deficit of GDP for the Centre.
  • Requires states to enact similar laws to control their fiscal deficit.

Amendments to FRBM Act

• 2018 Amendment: The FRBM Amendment Act required the central government to ensure that the fiscal deficit did not exceed 3% of GDP and total public debt remained under 60% of GDP.
• Fiscal Deficit Reduction: By 2025-26, the fiscal deficit is expected to be reduced to below 4.5% of GDP.

Way Forward: Strengthening Article 293

Guidelines for Borrowing Powers

• Transparency in Decision-Making: The Centre should ensure that the borrowing process is transparent, with clear standards and procedures for accepting or rejecting state borrowings.
• Consultative Process: The Centre should engage in consultations with states before imposing borrowing caps or conditions, fostering a cooperative federal structure.
• Equitable Treatment: Borrowing restrictions should apply uniformly to all states to avoid bias or favoritism.

Strengthening Fiscal Federalism

• Fiscal Autonomy: States should be given the flexibility to manage their finances in a way that reflects their unique economic needs and challenges.
• Periodic Reviews: The Net Borrowing Ceiling should be reviewed periodically to account for changing economic conditions and developmental priorities.