The central government, in 2023, imposed a ‘Net Borrowing Ceiling’ (NBC) on the State of Kerala to restrict the maximum possible borrowing that the State can make under the law. This ceiling is 3% of the projected Gross State Domestic Product (GSDP) for FY2023-24. The NBC now encompasses all borrowing avenues, including open market loans, financial institution loans, and liabilities from the public account of the State. Furthermore, to stop States from circumventing the borrowing cap through State-owned enterprises, the ceiling has been extended to cover certain borrowings by these entities as well.
This has been a huge blow to the financial position of the State, with Kerala finding it difficult to meet its expenditure. In addition, this has restrained the State from investing further in developmental and welfare activities. It has also ignited political and legal controversies which have created an incompatible situation between the Centre and the State. Kerala approached the Supreme Court of India on the issue of the encroachment on the executive power that is conferred on the State under Article 293 of the Constitution of India to borrow on the security and guarantee of the Consolidated Fund. The State has alleged that the State’s fiscal autonomy, as guaranteed and enshrined in the Constitution of India, has been illegally curtailed by the Centre. This has been the first case in the history of the Court wherein Article 293 has come up for interpretation.
Borrowing powers and provisions
Chapter II of Part XII of the Constitution deals with the borrowing powers of the Centre and States. Article 292 speaks about the borrowing power of the central government which entitles the central government to borrow loans upon the security of the Consolidated Fund of India. Article 293 empowers the State government to borrow within the territory of India upon the security of the consolidated fund of the State. In both cases, the extent of borrowing may be fixed from time to time by a law enacted by Parliament and the State legislature, respectively. As in Article 293(2), the Government of India may grant loans to any State subject to conditions laid down by any law made by Parliament up to the limits fixed under Article 292.
The central government can also provide guarantees upon the Consolidated Fund of India in respect of loans raised by any State. Article 293(3) imposes a restriction on the State government if the repayment of loans or a guarantee which has been given by the Government of India (if taken by the predecessor government is still outstanding). In such a case, the consent of the central government is essential to raise such a loan. The central government is afforded broad discretion over “consent” by specifying that it may be granted subject to any conditions as the Government of India deems appropriate.
Article 293 of the Constitution is adopted from Section 163 of the Government of India Act, 1935. In the Constituent Assembly, while Article 293 (draft Article 269) was debated on August 10, 1949, a member, Ananthasayanam Ayyangar, noted that the issue of borrowings and loans requires greater scrutiny as borrowing imposes heavy obligations on not only the present generation but also future generations. He suggested that a commission akin to the Finance Commission may be constituted.
Section 163(4) of the Government of India Act, 1935 stated that while exercising the power conferred under Section 163(3) regarding ‘consent’, the Federation shall not refuse or make unreasonable delay in granting the loan or providing guarantee, or impose any unreasonable conditions when sufficient cause is shown by the provinces. If any dispute arises out of the matter stated it was to be referred to the Governor-General whose decision shall be final.
But this clause was not adopted into the Constitution. The reason was that this provision was included in the Government of India Act, 1935 as it expected that a different agency that was not a national of India would be in charge of the administration. But after the Independence, it was felt that such a provision was not necessary as State governments replaced the provinces and a national government was established at the Centre.
Eliminating revenue shortfall
To implement the mandates in Article 292, the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted to maintain financial restraint by establishing goals such as the elimination of revenue shortfall and the reduction of fiscal deficit. To eliminate the revenue shortfall and the budgetary deficit, a target of 3% of GDP is established for the Centre’s yearly fiscal deficit ratio (FD). As in the Centre’s directives, States enacted their own pieces of legislation to control their fiscal deficit. The FRBM Amendment Act, 2018 required the central government to ensure that the fiscal deficit did not surpass 3% of GDP and that the total public debt did not surpass 60% of GDP. By 2025–26, the government expects to reduce the fiscal deficit to less than 4.5% of GDP. The Centre’s restriction on the borrowing limits of the States so as to attain fiscal consolidation by restricting the fiscal deficit, and without considering the financial position of States, is an encroachment of the autonomy of States. It also lowers their ability at budget balancing.
The issue of the borrowing power of States guaranteed under Article 293 of the Constitution is before the Supreme Court in the case filed by the State of Kerala. As the interpretation of Article 293 of the Constitution of India raises key questions about fiscal decentralisation, State fiscal autonomy and past borrowing practices, the Court has referred the issue of a State’s borrowing powers to a Constitutional Bench. The matter also touches on whether the fiscal regulations imposed by the Centre have negatively impacted the Reserve Bank of India’s control over fiscal consolidation.
Contemplating the transforming economic, political, and fiscal landscape in India, it is time to revisit Article 293 of the Constitution. Section 163(4) of the Government of India Act, 1935 warns the unnecessary refusal or delaying or the imposing of conditions in granting loans by the Centre. Similarly, a remedial measure, as mentioned in Section 163(4), could have been adopted in the Constitution when a dispute arises.
There is a need to strengthen this Article
Article 293 of the Constitution must be strengthened in the following manner.
As suggested by Ananthasayanam Ayyangar, a commission akin to the Finance Commission is essential to decide any issues that may arise regarding the approval of a loan upon considering the financial position of States as well as the Centre’s goal of limiting fiscal deficit.
There must be proper guidelines which are to be adhered to when the Centre exercises the wide powers granted under Article 293(4) of the Indian Constitution — crucial in maintaining a balanced fiscal framework between the Centre and the States, and which enhance cooperative federalism. Otherwise, there could be arbitrary decision-making that may disrupt fiscal discipline, leading to either unchecked borrowing or overly restrictive conditions.
When exercising the wide powers granted under Article 293(4), the Centre should adhere to the following guidelines: transparency in decision-making thereby ensuring that the procedures and standards for accepting or rejecting governmental borrowings are transparent to the public; having a consultative process, where there is consultation with State governments before prescribing any terms or limitations on borrowing which enhances cooperative approach; ensuring equitable treatment where there an employment of borrowing terms and restrictions applied uniformly for all States to eliminate prejudice or favouritism; an admiration for fiscal autonomy, ensuring that there is financial autonomy for a State, the restrictions are reasonable and do not unduly hamper a State’s ability to manage its finances effectively.
Adhering to these guidelines can ensure that the Centre’s powers under Article 293(4) are exercised fairly, transparently and in a manner that supports balanced fiscal management and cooperative federalism.
Vidya V. Devan is Assistant Professor in Law at the Gulati Institute of Finance and Taxation, Thiruvananthapuram, Kerala. Meenu Mohan is Assistant Professor in Law at the Gulati Institute of Finance and Taxation, Thiruvananthapuram, Kerala
Published – November 11, 2024 12:16 am IST
