Andhra Pradesh Seeks ₹7000 Crore Borrowing for FY 2023-2024

Andhra Pradesh Seeks ₹7000 Crore Borrowing for FY 2023-2024

Subject: Polity

Section: Federalism

Context:

Andhra Pradesh has requested permission to borrow ₹7,000 crore for the remaining duration of the fiscal year 2023-24. The state originally sought permission to borrow ₹11,000 crore for the same period, in accordance with the norms of Andhra Pradesh’s Fiscal Responsibility and Budget Management (FRBM) Act. Currently, the Central government has already granted approval for borrowing ₹4,000 crore, leaving the state’s request for the remaining amount.

Under the amended Andhra Pradesh FRBM Act of 2005, the fiscal deficit is capped at 4 percent of the Gross State Domestic Product (GSDP).

Constitutional dimension:

• Article 293(3) of the Constitution – deals with the borrowing powers of states in India. It states that a state within the Indian Union cannot borrow money unless the President of India, on the recommendation of the Governor of that state, has given his consent to such borrowing.
• In simpler terms, this article requires the states to seek the President’s approval, based on the Governor’s recommendation, if they intend to borrow money. This provision is in place to ensure that state borrowing from the entities is done with proper oversight and authorization.

Why do states need the Centre’s permission for borrowing, and is it mandatory for all states?

States require the Centre’s consent for borrowing as per Article 293(3) of the Constitution when they are indebted to the Centre due to previous loans. This requirement applies to all states in India because they are currently indebted to the Centre.

Why are these restrictions necessary?

These restrictions serve the purpose of protecting the Centre’s interests as a creditor and ensuring macroeconomic stability. State indebtedness can have a negative impact on the overall fiscal health of the nation, making it essential to maintain fiscal discipline and stability.

What is the FRBM Act?

The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce fiscal deficit.

What are the objectives of the FRBM Act?

1. The FRBM Act aims to introduce transparency in India’s fiscal management systems.
2. The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.

Key features of the FRBM Act:

The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

1. Medium Term Fiscal Policy Statement.
2. Macroeconomic Framework Statement.
3. Fiscal Policy Strategy Statement.

What is Fiscal Deficit?

• Fiscal deficit is the difference between the government’s total expenditure and its total revenue (excluding borrowings).
• It is an indicator of the extent to which the government must borrow in order to finance its operations and is expressed as a percentage of the country’s GDP.

Finance Commission: –

The Finance Commission is a constitutional body in India that plays a crucial role in fiscal federalism. It is established under Article 280 of the Indian Constitution, and its primary function is to recommend the distribution of financial resources between the central government and the state governments.

Here’s a brief overview of the Finance Commission’s key functions and responsibilities:

1. Resource Distribution: The primary task of the Finance Commission is to recommend the division of tax revenues and other financial resources between the Union (central government) and the states. This division ensures a fair and equitable distribution of funds to meet the needs of both the central and state governments.
2. Tax Devolution: The Commission recommends the share of central taxes to be allocated to the states. This allocation is vital for states to finance their various development programs and functions.
3. Grants-in-Aid: In addition to tax devolution, the Finance Commission also suggests grants-in-aid to states that may have special financial needs or face fiscal challenges. These grants aim to support states in fulfilling their obligations and responsibilities.
4. Fiscal Transfers: The Commission examines the fiscal situation of both the Union and the states and recommends measures to augment the revenue resources of the states. It also assesses the need for and provides recommendations on revenue-sharing agreements between states.
5. Other Matters: Apart from resource distribution, the Finance Commission may also be tasked with examining any other financial or fiscal matters referred to it by the President of India.
6. Five-Year Cycle: The Finance Commission is typically constituted every five years. Each new Commission’s recommendations are applicable for a specific five-year period, ensuring periodic reviews and adjustments in the fiscal relationship between the central and state governments.
7. Independence: The Commission is expected to make recommendations independently, free from political interference. Its members are typically experts in finance, economics, and related fields.
8. Parliament’s Approval: The Commission’s recommendations are presented to the President, who, in turn, lays them before Parliament. These recommendations need the approval of both houses of Parliament to become effective.

In summary, the Finance Commission is a crucial institution in India’s fiscal federal structure, playing a vital role in ensuring the equitable distribution of financial resources between the central government and the states, as well as addressing fiscal disparities and promoting cooperative federalism.