Fiscal battle: On borrowings and Kerala’s suit

Kerala’s suit raises questions on States’ right to borrow and the Centre’s power to limit it 

April 04, 2024 12:20 am | Updated 08:00 am IST

The Supreme Court of India order referring a suit filed by Kerala, challenging the Centre’s decisions curtailing its borrowings, to a Constitution Bench is a welcome development. The Court declined to grant an interim order to restore the position prior to the imposition of borrowing limits by the Centre, but the referral will give a larger Bench an opportunity to examine the extent to which the Union government may regulate a State’s borrowings. The litigation is much more than a tussle over the Centre’s charge of fiscal mismanagement against the Left Front regime in the State. The Court has recognised that it is also a constitutional question on Centre-State relations: an apparent conflict between efforts to maintain the country’s fiscal health on the one hand and moves that undermine the fiscal space of States on the other. At the heart of this dispute is Article 293, which confers executive power on the States to borrow money within limits prescribed by the State legislature. It also allows the Union to extend loans and guarantees to the States, and requires the Centre to give its consent and impose conditions for States to raise further loans while earlier ones are outstanding. Kerala contends that the Article does not confer on the Centre any power to regulate all State loans and that it can impose conditions only on borrowings from the Centre.

Kerala also challenges the Union’s decision to include borrowings by State-owned enterprises and the liabilities on its public account under its ‘Net Borrowing Ceiling’ (quantified as 3% of its projected Gross State Domestic Product for 2023-24, or ₹32,442 crore). A 2018 amendment to the Fiscal Responsibility and Budget Management Act capped the ‘general government debt’, or the sum total of the debts of the Central and State governments, at 60% of the GDP. The Union government argues that public finance being a national issue, it wanted to prevent the use of off-budget borrowings to bypass the borrowing ceiling. It also claims that unlimited borrowing by State governments will have the spillover effect of raising the cost of borrowing and crowding out private sector borrowers. The issue comes at a time when the current formula for distribution of revenue is seen as one that penalises States that perform better on social indicators. It is no surprise that Kerala, a topper in social advancement, faces this crisis. In an era in which a major revenue source for the States has been subsumed by a system in which they share the proceeds of a common Goods and Services Tax with the Centre, fiscal space has become precious. It is now up to the highest court to determine how strict the Centre should be on borrowing limits and giving consent to hold States to their fiscal obligations without violating federal norms.

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