Net Borrowing Ceiling (NBC) on Kerala
In 2023, the central government imposed a borrowing cap on Kerala, restricting its borrowing to 3% of the state’s projected Gross State Domestic Product (GSDP) for FY2023-24.
This ceiling covers all types of borrowing, including loans from the market, financial institutions, and state-owned enterprises.
The borrowing limit has severely impacted Kerala’s financial situation, making it difficult for the state to meet its expenditures and invest in development and welfare activities.
The restriction has led to political and legal disputes between the Centre and Kerala.
Kerala has approached the Supreme Court, arguing that the central government’s imposition violates its fiscal autonomy under Article 293 of the Constitution, which grants states the right to borrow within their own limits.
Constitutional Provisions on Borrowing
Article 292 allows the Centre to borrow on the security of the Consolidated Fund of India.
Article 293 empowers states to borrow on the security of their own Consolidated Fund.
The Centre can grant loans to states, but the consent of the Centre is required if a state has outstanding loans or guarantees from the Centre.
Historical Context
Article 293 is based on Section 163 of the Government of India Act, 1935, which dealt with borrowing powers during British rule, but was modified after independence to suit India's federal structure.
The provision about "consent" for loans was debated but not adopted in the Constitution.
Fiscal Responsibility and Borrowing Limits
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, and its amendments set fiscal limits for both the Centre and states, aiming to control deficits and public debt.
The central government's imposition of borrowing limits on states has been seen as encroaching on state autonomy and harming their ability to balance budgets.
The Supreme Court has referred Kerala’s case to a Constitutional Bench to interpret Article 293, which raises questions about fiscal decentralization, state autonomy, and the Centre’s control over state borrowing.
Recommendations for Strengthening Article 293
A commission, similar to the Finance Commission, should be established to address borrowing issues based on the financial position of states and the Centre’s fiscal goals.
Guidelines should be set for the Centre’s borrowing powers to ensure fairness, transparency, and consultation with states.
Proposed Guidelines for Borrowing Decisions
Clear, public decision-making processes for borrowing approvals.
States should be consulted before borrowing restrictions are imposed.
Borrowing terms should be applied uniformly to all states.
Restrictions should be reasonable and not overly limit a state’s financial independence.
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