Source: The Hindu 

Introduction 

In 2023, the central government put a limit on how much Kerala state can borrow. They called this the 'Net Borrowing Ceiling' (NBC), setting it at 3% of Kerala's GDP for 2023-24. This limit affects not just regular loans, but also covers market borrowing and borrowing by state-owned companies. This has created big problems for Kerala, making it hard for them to spend money on development and welfare programs. The issue has become so serious that Kerala went to the Supreme Court, making this the first time Article 293 of the Constitution of India, 1950 (COI) has needed court interpretation. 

What is NBC? 

• NBC is a limit imposed by the Central Government under Article 293(3) of Indian Constitution that restricts states' total borrowings from all sources, including open market borrowings. 
• The Central Government deducts various liabilities from this ceiling, including those from states' public accounts and borrowings by state-owned enterprises where principal/interest is paid from state budgets or revenues. 
• Starting FY2023, off-budget borrowings (loans taken by state entities and SPVs) are now counted as state government debt, improving transparency but potentially creating compliance challenges for states. 
• States facing reduced borrowing limits may need to rely more on alternative financing like Ways and Means Advances (WMA) and overdrafts from RBI. 
• While states typically disclose guaranteed debt in their budgets, the full extent of off-budget debt often remains undisclosed, making it difficult to determine exact NBC adjustments for each state. 
• This system aims to enhance fiscal discipline and transparency in state finances, though implementation faces challenges due to data limitations and post-pandemic borrowing patterns. 

Does the Net Borrowing Ceiling Imposed by the Centre Violate Kerala's Constitutional Fiscal Autonomy? 

• Constitutional Rights Violation: 
  • Kerala argues that the state's fiscal autonomy, which is guaranteed by the Constitution of India, has been illegally curtailed by the Centre. 
  • They question the constitutionality of the Net Borrowing Ceiling (NBC) imposed by the central government. 
• Financial Constraints: 
  • The 3% NBC limit on Gross State Domestic Product (GSDP) severely restricts their borrowing capacity. 
  • The ceiling covers all borrowing avenues including:  
    • Open market loans 
    • Financial institution loans 
    • Public account borrowings 
    • Borrowings by state-owned enterprises 
• Development Impact: 
  • The restrictions have made it difficult for Kerala to:  
    • Meet its regular expenditure needs 
    • Invest in developmental projects 
    • Continue welfare activities 
    • Manage state finances effectively 
• Scope of Central Control: 
  • Questions the extent of the Centre's power under Article 293 of the Constitution regarding:  
    • The right to borrow on the security of the Consolidated Fund. 
    • The central government's control over "consent" for state borrowing. 
• Legal Precedent: 
  • This case is historically significant as it's the first time Article 293 has come up for interpretation before the Supreme Court. 
  • Kerala challenges the Centre's power to impose conditions on borrowing that they consider unreasonable. 
• Fiscal Autonomy: 
  • State argues that these restrictions encroach on their constitutional right to manage their own finances. 
  • Questions whether the fiscal regulations imposed by the Centre have negatively impacted the Reserve Bank of India's control over fiscal consolidation. 

What is Article 293 of Indian Constitution? 

• Article 293 was adopted from Section 163 of the Government of India Act, 1935 and was extensively discussed in the Constituent Assembly. 
• It empowers state governments to borrow within Indian territory using the security of the Consolidated Fund of the State, subject to limits set by their respective state legislatures. 
• The Central government has the authority to make loans to states and provide guarantees for state loans, subject to conditions established by Parliament. 
• A key restriction is that states cannot raise new loans without the Centre's consent if they have any outstanding loans from the Central government. 
• The Centre can impose conditions when granting consent for state borrowing under Article 293(4), which gives it significant control over state borrowing. 
• Article 293 was designed to maintain fiscal discipline while balancing state autonomy with central oversight of borrowing. 
• During the Constituent Assembly debates, member Ananthasayanam Ayyangar emphasized that borrowing needed scrutiny due to its impact on future generations. 
• The original provision in Section 163(4) of the 1935 Act regarding dispute resolution through the Governor-General was not included in Article 293 of the Constitution. 
• The Article has gained renewed significance in contemporary times, as evidenced by cases like Kerala's challenge to the Centre's borrowing restrictions, making it the first time Article 293 has come up for constitutional interpretation. 

What are the Legal Provisions referred? 

• Constitutional Provisions (Article 293): 
  • Article 293(2): The State government can borrow within India on the security of the Consolidated Fund.  
  • Article 293(3): Central government has power to give consent and set conditions for state loans. 
  • Article 293(4): Central government can provide guarantees for state loans. 
  • The borrowing limits must be fixed by Parliament and State legislature respectively. 
• Government of India Act, 1935 References: 
  • Section 163(3): Provides basis for Article 293 of Constitution 
  • Section 163(4): States that federation shall not:  
    • Refuse or delay unreasonably in granting loans. 
    • Impose unreasonable conditions when sufficient cause isn't shown. 
    • This clause wasn't included in the final Constitution. 
• Fiscal Responsibility and Budget Management (FRBM) Act, 2003: 
  • Establishes goals for elimination of revenue shortfall. 
  • Sets target of 3% of GDP for Centre's yearly fiscal deficit. 
  • Requires central government to ensure:  
    • Fiscal deficit doesn't surpass 3% of GDP. 
    • Total public debt doesn't exceed 60% of GDP. 
  • By 2025-26: Government aims to reduce fiscal deficit to less than 4.5% of GDP. 
    • FRBM Amendment Act, 2018. 
    • Required the central government to monitor fiscal deficit. 
    • States enacted their own fiscal legislation to control deficits. 
    • Aimed at maintaining financial restraint through measures like:  
      • Elimination of revenue shortfall 
      • Reduction of fiscal deficit 
• Section 163(3) of Government of India Act, 1935: 
  • Discusses the power of providing 'consent'. 
  • Specifies conditions for granting loans. 
  • Deals with guaranteed provisions. 
  • Was originally included because a different agency was expected to handle administration. 
• These provisions collectively form the legal framework governing: 
  • State borrowing powers 
  • Centre-State financial relations 
  • Fiscal responsibility measures 
  • Constitutional safeguards for state autonomy 

What Guidelines Should the Centre Follow When Exercising Powers Under Article 293 to Ensure Fair Borrowing Practices? 

• A commission akin to the Finance Commission is considered essential to decide issues that may arise regarding loan approvals, taking into account both:  
  • The financial position of states 
  • The Centre's goal of limiting fiscal deficit 
• There must be proper guidelines that are to be adhered to when the Centre exercises powers under Article 293(4) of the Constitution. These guidelines should:  
  • Be crucial in maintaining a balanced fiscal framework between Centre and States. 
  • Enhance cooperative federalism 
• When exercising powers under Article 293(4), the Centre should follow these specific approaches:  
  • Adhere to following guidelines: transparency in decision-making. 
  • Ensure procedures and standards for accepting/rejecting borrowing are transparent to the public. 
  • Have a consultative process, especially when dealing with State governments. 
  • Consider conditions that enhance cooperative governance. 
• Additional guidelines should ensure:  
  • Exercise of powers is done fairly and transparently. 
  • Support balanced fiscal management. 
  • Promote cooperative federalism. 
  • Powers are not exercised in a manner that disrupts fiscal discipline. 
  • Avoid leading to unchecked borrowing or overly restrictive conditions. 
• The guidelines should guarantee:  
  • Equitable treatment when employing borrowing terms. 
  • Uniform application of restrictions across all States. 
  • No prejudice or favoritism. 
  • Respect for fiscal autonomy. 
  • States can manage finances effectively without undue hampering. 

Conclusion  

Looking ahead, there need to be clear guidelines for how the central government uses its powers over state borrowing. When making decisions about state loans, the center should follow transparent processes, consult with states, and treat all states fairly. The rules should achieve two main goals: maintaining financial discipline while also respecting state autonomy. Any restrictions placed on states should be reasonable and shouldn't overly limit a state's ability to manage its finances. This balance is crucial for maintaining healthy federal relations in India.