Kerala has challenged the Centre’s imposition of a ‘Net Borrowing Ceiling’ (NBC) under Article 293, asserting it undermines State fiscal autonomy. This dispute highlights broader issues in Centre-State fiscal relations within India’s federal framework.

Net Borrowing Ceiling (NBC)

• In 2023, the Central Government imposed a Net Borrowing Ceiling (NBC) on the State of Kerala, capping its borrowing at 3% of the projected Gross State Domestic Product (GSDP) for FY 2023-24. 
• This ceiling encompasses all borrowing channels, including open market loans, financial institution loans, and public account liabilities.
  • It also applies to certain borrowings by state-owned enterprises to prevent the State from bypassing these limits through indirect means. 
• The NBC has significantly impacted Kerala’s financial capacity, restraining expenditure on development and welfare and sparking political and legal controversies and thus it is challenged in the supreme court especially article 293 for reinterpretation.

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Constitutional Provisions Related to Borrowing Powers

Under Chapter II of Part XII of the Constitution:

Article 292: 

• The executive power of the Union government allows it to borrow money using the security of the Consolidated Fund of India. 
• However, the total amount it can borrow is limited to the levels set by Parliament through laws. 
• Additionally, the government can give financial guarantees, but again, only within limits that Parliament has established.

Article 293:

• Clause 1: This allows State governments to borrow money within India using the Consolidated Fund of the State as security. 
• Clause 2: The Government of India can provide loans to any State or offer guarantees for loans raised by States, as long as the borrowing limits set under Article 292 are not exceeded. 
  • Any such loans or guarantees made by the Centre are charged on the Consolidated Fund of India.
• Clause 3: Article 293(3) states that if a state owes money to the central government or if the central government has guaranteed any of the state’s previous loans, the state cannot borrow more money without the Centre’s permission.
• Clause 4: A consent under clause (3) may be granted subject to such conditions, if any, as the Government of India may think fit to impose.  

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

•  To implement the mandates in Article 292 and control debt levels and deficits, the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted. 
  • This Act set a fiscal deficit target of 3% of GDP for the Centre and required States to enact their own fiscal responsibility laws. 
• As per Centre’s Directives, states also enacted similar laws.
• Fiscal Targets:
  • For Centre:
    1. Fiscal Deficit limit: 3% of GDP
    2. Revenue Deficit: Zero (complete elimination was target)
    3. Annual reduction targets: 0.3% for fiscal deficit
    4. Total government guarantees should not exceed 0.5% of GDP
  • For States:
    1. Fiscal Deficit ceiling: 3% of GSDP (Gross State Domestic Product)
    2. Individual state targets vary based on their debt-GSDP ratio
    3. States need Centre’s permission to borrow if they exceed the limit
    4. Additional borrowing flexibility of 0.5% GSDP linked to power sector reforms
• By 2025–26, the fiscal deficit target is <4.5% of GDP. However, the Centre’s borrowing restrictions on states for fiscal consolidation undermine their financial autonomy and hinder budget balancing.

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Legal Challenge

• The NBC and restrictions on borrowing have led Kerala to approach the Supreme Court. 
• Kerala argues that the Centre’s constraints violate the State’s fiscal autonomy as guaranteed under Article 293, claiming that these restrictions infringe on the executive power vested in States. 
• This case has brought Article 293 under scrutiny for the first time, raising questions about fiscal decentralisation and State autonomy.
• The Supreme Court has referred the interpretation of Article 293 to a Constitutional Bench to address these complex issues and assess whether the Centre’s conditions undermine the Reserve Bank of India’s role in fiscal management.

Way Ahead: Reforms Needed

The case of Kerala highlights the need to refine Article 293 to better support State autonomy and cooperative federalism. Some recommendations include:

1. Establish a Borrowing Advisory Commission

• As proposed by Ananthasayanam Ayyangar during the Constituent Assembly debates, a commission akin to the Finance Commission could be established to resolve borrowing disputes. 
  • This body would assess each State’s financial position and ensure alignment with the Centre’s fiscal consolidation goals.

2. Clear Guidelines for Centre’s Powers under Article 293(4): To prevent arbitrary restrictions on State borrowing, guidelines for Article 293(4) are essential:

• Transparency: Ensure transparent decision-making on borrowing approvals, with procedures accessible to the public.
• Consultative Process: Engage in consultation with State governments before imposing terms or restrictions, fostering a cooperative approach.
• Equitable Treatment: Apply uniform borrowing terms to all States to prevent bias or favouritism.
• Respect for Fiscal Autonomy: Ensure restrictions are reasonable and do not hinder States’ financial management capacities unduly.

3. Drawing from Historical Safeguards in the Government of India Act, 1935

• Reconsidering the protective measures from Section 163(4) of the 1935 Act could help prevent unreasonable delays, conditions, or refusals in granting borrowing consent by the Centre.

4. State-Specific Borrowing Considerations:

• When it comes to borrowing, each state in India has unique financial characteristics, and these must be considered when assessing borrowing capacity. 
• States like Kerala, with high literacy, strong revenue generation, and remittances, can manage more debt and repay loans, while less developed states with weaker fiscal health may struggle to manage borrowing, necessitating stricter controls.

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Conclusion

Reforms are needed to ensure that the Centre’s powers are exercised in a fair, transparent, and equitable manner. This will promote balanced fiscal management while supporting cooperative federalism, allowing both the Centre and States to work together efficiently without compromising state autonomy or financial stability.

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