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Open Market Borrowing UPSC NOTE


What is open market borrowing?

  • Open market borrowings are done by states to meet expenditure requirements, to fund their fiscal deficits.

Who sets limit for states?

  • Article 293(3) of the Constitution requires states to obtain the Centre’s consent in order to borrow in case the state is indebted to the Centre over a previous loan.

  • This consent can also be granted subject to certain conditions by virtue of Article 293(4).

  • In practice, the Centre has been exercising this power in accordance with the recommendations of the Finance Commission.

  • Every single state is currently indebted to the Centre and thus, all of them require the Centre’s consent in order to borrow.

  • The Centre can impose conditions only when it gives consent for state borrowing, and it can only give such consent when the state is indebted to the Centre.

Recent issue in Kerala

  • Union Finance Ministry pegging the open market borrowing limit at ₹15,390 crore, which is lower than the State’s projections.

  • The Kerala government contended that it was eligible to borrow ₹32,442 crore — equivalent to 3% of GSDP — in 2023-24 in line with the Finance Commission recommendations.

  • The Centre informed the State that the open market borrowing limit for 2023-24 was set at ₹20,521 crore, of which ₹15,390 crore constituted the permitted borrowing for the first nine months (April-December 2023).

  • In recent years, the Comptroller and Auditor General of India warned that the ‘‘off-budget borrowings” by the Kerala Infrastructure Investment Fund Board (KIIFB), a special purpose vehicle for mobilising funds for infrastructure projects, and the Kerala Social Security Pension Ltd (KSSPL) could plunge the State into a ‘‘debt trap,” a fear which the State government rejected as being “wholly unfounded”.

  • Ignoring the State’s objections, the Centre decided to treat KIIFB and KSSPL borrowings as direct liabilities of the State, resulting in the deduction of ₹14,312.80 crore from the latter’s borrowing limit in four annual instalments.

  • The State government’s argument that these borrowings are contingent liabilities was not accepted. 

  • It had further accused the Centre of adopting double standards in the matter as the latter’s own off-budget borrowings are not included in its overall debt or fiscal deficit.



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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Open Market Borrowing UPSC NOTE
Open Market Borrowing UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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