Context

Recently, the SC ordered a suit filed by Kerala challenging the Centre’s decisions curtailing its borrowings, to a Constitution Bench.

Article 293: Borrowing Powers of States

• State’s Right to Borrow: It gives states the executive power to borrow money within the limits that the state legislature sets.
• Central Government’s Role:
  • The Central Government can give loans and guarantees to states.
  • If a state already has loans from the Centre, the Centre needs to give its consent before the state can borrow more, and the Centre can add conditions to that permission.

Supreme Court’s Order

• Reduced Borrowing Limit: The Centre reduced Kerala’s net borrowing ceiling (NBC) within the set Fiscal Responsibility and Budget Management (FBM) Act limits. 
  • This effectively limited the amount of money Kerala could borrow in a given financial year.
• Citation of “Over-Borrowing”: The Centre argued that Kerala had exceeded its borrowing limits in the previous financial year, justifying a reduction for the current year.

Major Reasons

• FRBM Act Compliance:

  • The Centre’s primary argument was that Kerala violated the FRBM Act, which sets guidelines for fiscal prudence by states.
  • These guidelines aim to maintain macroeconomic stability and prevent excessive debt burdens on states.

• Concerns over Kerala’s Financial Health:

• • The Centre expressed concerns about Kerala’s increasing debt and fiscal deficit.
  • They likely argued that the reduced borrowing limit was necessary to prevent further financial strain and potential risks to the state’s economy.

• Off-Budget Borrowing Practices:

• • Kerala has been accused of off-budget borrowings through entities like the Kerala Infrastructure Investment Fund Board (KIIFB).
  • The Centre may have considered these practices as attempts to circumvent borrowing limits, adding to its decision to restrict the state’s borrowing further.

• The Supreme Court Case:

• • Kerala challenged the decision in the Supreme Court, but the Court declined to give interim relief.
  • The matter was referred to a five-judge Constitution bench, which means the legal validity of the Centre’s action is still being adjudicated.

Conclusion

It is now up to the highest court to determine how strict the Centre should be on borrowing limits and giving consent to hold States to their fiscal obligations without violating federal norms.