State borrowing limits: Ready for dialogue with Kerala, Centre informs SC
- February 14, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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State borrowing limits: Ready for dialogue with Kerala, Centre informs SC
Subject: Polity
Section: Federalism
Context:
- The Union government informed the Supreme Court on Tuesday that it is prepared to engage with the Kerala government on the limits the Centre imposed on the state’s borrowing powers.
More on news:
- This development came after a two-judge bench comprising Justice Surya Kant and Justice K. V. Viswanathan suggested that the finance secretary of Kerala meet with the Union finance minister to resolve the matter.
- Finance ministry clarified that there was no proposal to relax the existing terms for borrowing capacity of state governments, including Kerala, for 2023-24.
- Centre applies a common yardstick while fixing the annual borrowing limit of all state governments under Article 293(3) of the Constitution, and that it is guided by the recommendations of the Finance Commission.
Arguments by Kerala Government:
- The Kerala government challenged the Centre’s decision to impose a ceiling on its borrowing amount.
- Kerala argued that this restriction resulted in a severe crisis in its budget operations and violated the principles of fiscal federalism.
- Section 4 of the Fiscal Responsibility and Budget Management Act, 2003, imposed a net borrowing ceiling on Kerala, restricting its borrowings from all sources, including from the open market.
Centers view:
- The Union government stated that any financial stress faced by the Kerala government was primarily due to poor financial mismanagement.
- According to the Union government, “substantial financial resources” were provided to the Kerala government from financial years 2020-21 to 2023-24, over and above the amount recommended by the 15th Finance Commission.
- The Union government also said any state defaulting on debt servicing could create reputation issues and a domino effect, threatening India’s financial stability.
- The Attorney General emphasized that all states require permission from the Centre to borrow from any source.
- This permission is granted while considering the overall objectives of macroeconomic stability for the country as a whole.
- The borrowing limits are fixed in a non-discriminatory and transparent manner as guided by the recommendations of the Finance Commission.
- Reckless borrowing by states to finance unproductive expenditure could crowd out private borrowing from the market.