| PYQ Relevance: Q) What changes has the Union Government recently introduced in the domain of Centre-State relations? Suggest measures to be adopted to build the trust between the Centre and the States and to strengthen federalism. (UPSC CSE 2024) Q) The jurisdiction of the Central Bureau of Investigation (CBI) regarding lodging an FIR and conducting a probe within a particular State is being questioned by various States. However, the power of the States to withhold consent to the CBI is not absolute. Explain with special reference to the federal character of India. (UPSC CSE 2021) Q) Though the federal principle is dominant in our Constitution and that principle is one of its basic features, it is equally true that federalism under the Indian Constitution leans in favour of a strong Centre, a feature that militates against the concept of strong federalism. (UPSC CSE 2014) Prelims: Which one of the following in Indian polity is an essential feature that indicates that it is federal in character? (UPSC CSE 2021) a) The independence of the judiciary is safeguarded. b) The Union Legislature has elected representatives from constituent units. c) The Union Cabinet can have elected representatives from regional parties. d) The Fundamental Rights are enforceable by Courts of Law. |
Mentor’s Comment: Kerala filed an original suit under Article 131 of the Constitution, which allows the Supreme Court to resolve disputes between state and central governments. The state claims that the Net Borrowing Ceiling (NBC), set at 3% of its Gross State Domestic Product (GSDP) for FY2023-24, arbitrarily restricts its ability to borrow funds, thereby threatening its financial stability.
Today’s editorial discusses the implications of the NBC imposed by the central government on state governments, particularly focusing on Kerala’s situation. The article also highlights Constitutional provisions, Fiscal decentralization, and the ongoing legal challenges regarding borrowing powers.
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Let’s learn!
Why in the News?
The Supreme Court of India is currently reviewing a case brought by the Kerala government challenging the Net Borrowing Ceiling (NBC) imposed by the central government.
- This case raises significant questions about federalism and fiscal autonomy in India, particularly regarding the borrowing powers of state governments.
What is Net Borrowing Ceiling (NBC) imposed by the Central government on the states?
- It is a fiscal policy tool imposed by the Indian central government to regulate the borrowing capacity of state governments where the NBC is set at 3% for FY 2023-24 from the projected Gross State Domestic Product (GSDP) for each state (recommended by the Fifteenth Finance Commission).
- This ceiling encompasses all forms of borrowing, including loans from financial institutions, open market borrowings, and liabilities from the public accounts of the states.
- The NBC includes not only direct borrowings by state governments but also extends to borrowings by state-owned enterprises (SOEs) that are serviced through state budgets, which aims to prevent states from bypassing borrowing limits through SOEs.
| Constitutional Provisions: The Constitution of India outlines borrowing powers under Chapter II of Part XII: • Article 266(2): This article provides that all money received by the government should be credited to the Consolidated Fund of India or the Consolidated Fund of the State. It implies that funds not part of these consolidated accounts can be managed separately, suggesting that certain state revenues should not be included in calculations for borrowing limits. • Article 292 allows the central government to borrow against the Consolidated Fund of India. • Article 293 empowers state governments to borrow against their own Consolidated Funds but requires prior consent from the central government if previous loans are outstanding. • Entry 43 of the State List: This entry allows states to legislate on matters concerning public debt, indicating that states have a degree of autonomy over their financial affairs. What are the arguments presented? • Kerala’s Position: The imposition of NBC violates principles of fiscal federalism and undermines its Constitutional autonomy. The ability to determine borrowing limits should reside with individual states, allowing them to address their unique financial situations effectively. • Union Government’s Defense: The borrowing limits are based on recommendations from Finance Commissions and are applied uniformly across all states. Kerala’s financial difficulties are attributed to its fiscal mismanagement over two decades. Allowing Kerala to exceed its borrowing limits could set a dangerous precedent that might encourage other states to disregard fiscal discipline. • Supreme Court’s Interim Ruling: On April 1, 2024, the SC declined to grant interim relief to Kerala, stating that any financial hardship faced by the state could not be attributed solely to the NBC. The Court emphasized that providing additional funds could have broader implications for national fiscal health. It noted that Kerala had already received substantial relief from the Centre during its financial crisis. |
Restrictions imposed by the NBC and their implications on the States:
- Financial Constraints: States may find it challenging to meet essential expenditures such as pensions and welfare schemes due to limited borrowing capacity.
- Impact on Development: The ceiling restricts states’ ability to invest in infrastructure and developmental projects, potentially stunting economic growth and public service delivery
- Legal Challenges: The ongoing legal disputes highlight tensions between state autonomy and central control over fiscal policies, raising questions about the balance of power in India’s federal structure.
How do these borrowing restrictions affect Fiscal Federalism in India?
- Constraints on State Autonomy: The NBC limits states’ ability to borrow, undermining their financial independence and capacity to manage their own budgets. States struggle to finance essential services and infrastructure projects, which can hinder economic development and public welfare initiatives.
- For Example, Kerala’s ability to finance initiatives through the Kerala Infrastructure Investment Fund Board (KIIFB) is hampered, leading to delays in development activities crucial for economic growth.
- Erosion of Cooperative Federalism: The imposition of NBC reflects a shift towards central control, potentially eroding the principles of cooperative federalism that empower states to address local needs.
- Legal challenges, like Kerala’s case against the NBC, highlight conflicts between state rights and central authority, raising questions about the balance of power in fiscal governance.
- Implications for Fiscal Responsibility: While the Centre argues that NBC promotes fiscal discipline, states contend that it infringes on their constitutional rights, creating tension between maintaining national fiscal health and respecting state autonomy.
Need for the Reform:
- Article 293 needs to be strengthened to enhance cooperative federalism. Proposed reforms include:
- Establishing a commission similar to the Finance Commission to address loan approvals based on states’ financial conditions.
- Implementing guidelines for transparency and equitable treatment in borrowing decisions made by the Centre.
- Ensuring that restrictions do not excessively hinder states’ fiscal management capabilities.
Way Forward: Without reforming the current borrowing framework, states like Kerala may face severe financial constraints, hampering their ability to meet essential expenditures. The ongoing legal discourse around NBC reflects broader concerns about fiscal decentralization and the balance of power between state and central governments in India that needs to be addressed soon.
