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State’s borrowing powers hit: Kerala FM

GS Paper 2

Syllabus: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure

 

Source: The Hindu

Direction:

Context: Finance minister of Kerala KN Balagopal defended the state’s financial position saying it was not under stress and that the state’s debt level in comparison to its own GDP is below the permissible limit.

 

Background:

The Reserve Bank of India in a report titled ‘State Finances: A Risk Analysis‘ said states’ fiscal positions deteriorated sharply in 2020 with a sharp decline in revenue, an increase in spending and a sharp rise in debt to GSDP ratios.

  • Based on the debt to GSDP ratio in 2020-21, the RBI found the debt burden in 10 states including Kerala quite high.
  • Kerala’s debt during the financial year 2021-22 was estimated to be at 37 per cent and is expected to be 2 per cent during the current financial year, data showed.

 

Kerala’s stand:

Finance minister of Kerala said, there were no “lapses in finance management.”

  • Centre had taken powers of the states to collect taxes: As part of GST, the central government has taken all powers to collect taxes from state governments and also decreased the states’ share. The state lost a minimum of ₹ 12,000 crores.

 

Basics about borrowing of states:

Constitutional provisions:

Article 293 in The Constitution deals with the Borrowing by States.

It says:

  • The executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits, and to the giving of guarantees within such limits, if any, as may be so fixed.

 

Why states need Centre’s permission while borrowing?

  • 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.
  • 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.

 

Need for such restrictions:

  • One possible purpose behind conferring this power upon the Centre was to protect its interests in the capacity of a creditor.
  • A broader purpose of ensuring macroeconomic stability is also discernible, since state indebtedness negatively affects the fiscal health of the nation as a whole.

 

InstaLinks:

Mains Link:

Discuss the issues related to financial autonomy of states and how they can be addressed?

Prelims Link:

  1. Are state governments allowed to take loans directly through borrowings?
  2. Role of Central Government.
  3. States with highest GSDP.
  4. Article 293.
  5. When can the centre impose conditions on states?