Answer

The Net Borrowing Ceiling (NBC), implemented under Article 293 of the Indian Constitution, regulates the borrowing limits of states to ensure fiscal stability, especially if the state has outstanding loans with the Centre. Recently, states like Kerala have challenged the NBC, citing fiscal autonomy concerns. The debate on NBC underscores the complex interplay between fiscal discipline and cooperative federalism in India’s financial framework.

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Benefits of Net Borrowing Ceiling on Centre-State Financial Relations

• Ensures Fiscal Responsibility: By setting borrowing limits, the NBC encourages states to maintain fiscal responsibility, avoiding unsustainable debt levels.
  For example: The 15th Finance Commission recommended that states reduce their fiscal deficit to 3% of GSDP from 2023-24 promoting financial prudence.
• Promotes Long-term Economic Stability: Borrowing restrictions aim to prevent states from accumulating excessive debt, promoting stable economic growth across India.
  For example: States adhering to NBC guidelines have shown lower fiscal deficits and more stable credit ratings, as reported by RBI’s annual state finances report.
• Balances National Financial Health: NBC helps align state borrowings with national economic goals, supporting an integrated fiscal policy.
  For example: The 15th Finance Commission has recommended borrowing limits that consider both state and national debt levels, ensuring balanced economic planning.
• Enhances Transparency and Accountability: Setting borrowing limits encourages states to prioritise projects and maintain fiscal transparency, which strengthens accountability in public expenditure.
  For instance: States must report their borrowing and spending under NBC, enhancing budgetary accountability, as per the CAG of India.
• Encourages Efficient Resource Allocation: The NBC incentivizes states to use resources efficiently by limiting borrowing, which can drive focused, result-oriented governance.

Challenges of the Net Borrowing Ceiling on Centre-State Financial Relations

• Limits State Development Projects: NBC can restrict states’ ability to finance large-scale development projects, affecting growth in critical sectors like health and education.
  For example: Punjab faces challenges in funding agricultural subsidies due to NBC restrictions, as noted by the State Finance Department.
• Unequal Impact on States with Lower Revenue Generation: States with weaker revenue generation face higher dependency on borrowing, and NBC could limit their financial scope.
• Restricts Emergency Financial Flexibility: During crises, NBC may hinder states from accessing immediate funds for disaster management and relief.
  For instance: Recent disaster rehabilitation efforts in Kerala faced limitations due to borrowing caps under NBC, impacting timely financial response.
• Potentially Inhibits Regional Economic Growth: NBC may slow down state-specific growth plans by limiting borrowing for regional infrastructure and employment projects.
• Administrative Burden and Compliance Costs: States may incur higher compliance costs in adhering to NBC, impacting their administrative efficiency and resource management.
  For instance: States must align financial plans with NBC limits, increasing workload on state finance departments.

Impact on Fiscal Discipline vs. Cooperative Federalism under Article 293

• Strengthens Fiscal Discipline: NBC reinforces fiscal discipline by requiring states to manage resources responsibly, aligning with the objectives of Article 293.
  For instance: According to the RBI study paper, Telangana’s debt-to-GSDP ratio was lowest in 2022 post NBC restrictions.
• Potential Strain on Cooperative Federalism: Some states argue that NBC undermines cooperative federalism by restricting their fiscal autonomy to make region-specific financial decisions.
  For instance: Kerala challenged the NBC in the Supreme Court over fiscal autonomy under Article 293 arguing that the borrowing restriction harms its finances and limits funding for development.
• Encourages Centralised Fiscal Control: NBC allows the Centre to oversee state borrowings, which some argue could strengthen the Centre’s influence over state finances.
  For instance: In many instances, the Finance Ministry has intervened in state borrowing plans, aligning them with national fiscal objectives.
• Promotes Accountable Borrowing Practices: The conditional borrowing limits under Article 293(4) ensure that states are accountable in their fiscal practices, which is beneficial for inter-state equity.
• Creates Tension on Fiscal Autonomy: NBC could limit states’ abilities to fund development projects independently, potentially creating a conflict in Centre-State relations.
  For instance: The Constitutional Bench in the Supreme Court is assessing Kerala’s plea on NBC to balance fiscal discipline with state autonomy.

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Way Forward

• Establish Borrowing Advisory Commission: A commission could evaluate each state’s financial health and borrowing needs, enabling a balanced borrowing framework.
  For instance: A model similar to the Finance Commission could offer independent advice on borrowing thresholds.
• Adopt Flexible Borrowing Caps Based on State Needs: Tailoring NBC limits according to state-specific economic conditions can ensure fiscal responsibility without hindering growth.
  For instance: High-revenue states like Maharashtra could have adjusted limits to support regional initiatives.
• Encourage Cooperative Consultation Mechanism: Strengthening consultative frameworks between Centre and States would allow cooperation and understanding in NBC implementation.
  For example: A State Finance Council could be created for regular discussions on fiscal policies and borrowing limits.
• Enhance Transparency in Borrowing Policies: Clear and transparent guidelines on NBC will help states plan more effectively while ensuring accountability in the Centre’s decisions.
  For example: NITI Aayog has suggested public reporting of NBC rules and rationale to increase transparency.
• Enable State-Specific Fiscal Autonomy with Monitoring: Providing fiscal autonomy with regular monitoring can support states’ financial planning without compromising stability.
  For instance: States can have more autonomy in budget planning, overseen by periodic reviews from the Finance Ministry.

The Net Borrowing Ceiling offers a dual framework of fiscal discipline and cooperative federalism, balancing economic stability and state autonomy. While it enforces prudent borrowing practices, adjustments are needed to support states’ financial independence and development priorities. Reforms in borrowing policies, advisory mechanisms, and transparency can empower states to maximise their fiscal potential within India’s federal structure

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