Source: The Hindu

Introduction

Kerala Chief Minister will protest in New Delhi on 8th February 2023, decrying what the state government perceives as the Centre's imposition of a financial embargo on Kerala. The crux of the issue lies in the Centre's imposition of a Net Borrowing Ceiling (NBC) on Kerala, limiting the state's ability to borrow funds from various sources. This move has plunged Kerala into a severe financial crisis, prompting the state government to challenge the legality of NBC in the Supreme Court. The broader implications of this conflict underscore the alarming erosion of fiscal federalism in India.

What is the Contention Regarding NBC?

• The NBC places restrictions on states' borrowings from all sources, including open market borrowings.
• Kerala's contention primarily stems from the inclusion of debt taken by state-owned enterprises, such as the Kerala Infrastructure Investment Fund Board (KIIFB), in the state's overall debt.
• This inclusion severely constrains Kerala's financial flexibility, hindering its ability to fund essential services and welfare schemes.

What are Constitutional Concerns?

• Issue:
  • The imposition of the NBC invokes Article 293(3) of the Constitution, which mandates state consent for raising loans if previous loans from the Centre remain outstanding.
  • However, the Centre's decision to include extra-budgetary borrowings by state-owned enterprises raises constitutional questions regarding the Centre's authority to regulate state finances.
  • While the Finance Commission emphasizes fiscal transparency, it has not explicitly called for the inclusion of state-owned enterprises' debt in the NBC.
• Constitutional Provision:
  • Article 293(3) of the Constitution of India pertains to the power of the state government to borrow money from the Consolidated Fund of India or the public fund of the state.
  • A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India or by its predecessor Government.

What are Jurisdictional Disputes?

• Parliament's authority over "Public Debt of the State" conflicts with Entry 43 of the State List, which grants states exclusive jurisdiction over public debt matters.
• Additionally, Kerala argues that balances in the state's public account should not be subject to the NBC, citing Article 266(2) of the Constitution.
• The state contends that activities related to public accounts fall within the purview of the State Legislature, and the Centre lacks the authority to include withdrawals from public accounts in the NBC.

What is Kerala Fiscal Responsibility Act, 2003?

• The Kerala Fiscal Responsibility Act, 2003, sets fiscal deficit targets for the state, emphasizing internal mechanisms for budget management and fiscal discipline.
• It is a legislation enacted by the Government of Kerala, a state in India, aimed at promoting fiscal discipline, transparency, and accountability in the management of the state's finances.
• The Act was passed to ensure that the state government maintains prudence in fiscal management and works towards achieving fiscal stability.

What are the Implications for Development and Welfare?

• The Kerala Infrastructure Investment Fund Board (KIIFB) represents Kerala's innovative approach to funding infrastructure projects.
• However, Kerala's ability to fund development projects should not come at the expense of essential services for its citizens.
• The finance minister warns that denying Kerala the ability to borrow could lead to catastrophic consequences in a revenue-scarce state.

How Current Conflict is Leading to Annihilative Federalism?

• The current conflict reflects a troubling shift in India's federal structure from cooperative federalism to what could be termed as “annihilative federalism”.
• The Centre's borrowing restrictions exemplify the destructive nature of this emerging federal paradigm, posing significant challenges to state autonomy and fiscal stability.

Conclusion

• The Kerala-Centre standoff reveals fiscal federalism challenges in India. Kerala's challenge in SC against the NBC highlights the need for cooperative federalism. Balanced fiscal powers foster sustainable development. The Centre must engage Kerala constructively, respecting states' rights and India's federal integrity.