Kerala finance minister K.N. Balagopal recently wrote a detailed letter to Union Finance Minister Nirmala Sitharaman concerning the grave financial crisis that state governments face. The letter states that the Union Ministry of Finance has arbitrarily, in the name of off-budget borrowing, made a reduction of approximately Rs 4,000 crore in the net borrowing limits of the state.
According to Balagopal, Kerala alone would have to contend with a reduction of Rs 23,000 crore in resources for financing the budget in the current financial year, seriously impacting the government’s ability to conduct welfare expenditure, including for targeted schemes for the poor, for housing, education and healthcare.
The letter also raises serious issues with respect to the governing dynamics of Centre-state federal relations, and of allowing autonomy to states like Kerala to manage their fiscal position vis-à-vis the Centre, and with respect to the constitutional interpretation of provisions under Article 280, which are often referred to by the Finance Commissions for regulating sub-national borrowings.
Balagopal’s letter says: “Article 293(3) of the Constitution fetters the state’s power to raise loans. Under this provision, if there is still any part of a loan made to the State by the Government of India or in respect of which the Government of India has given a guarantee, State is forbidden from raising ‘any loan’ without the consent of the Union Government.”
The words ‘any loan’ appearing in Article 293 (3) must be read as any loan advanced by the central government. This was well settled in the 1987 Supreme Court judgement of Chandra Mohan vs State of UP, AIR 1966. Any different interpretation of the words ‘any loan’ would cut at the nation’s federalist core, which is part of the basic structure of the Constitution.
Article 293(3) can be legitimately used for “imposing conditions related to a request for borrowing of a State Government. This cannot be used to control or administer the borrowing of the State Government. Under the Constitution, these are matters that exclusively remain in the domain of the State Government”.
The Union government’s coercive attitude remains consistent in its treatment, and interpretation of clauses with other non-BJP ruled states too. Recently, Telangana and Tamil Nadu too made similar observations about the need to preserve constitutionally safeguarded autonomy, with states remaining able to manage their fiscal priorities, including for borrowings.
Article 283(2) confers on the states the powers of regulating its public account under state laws. The public account of a state reflects its “internal financial transactions where constitutionally, the State plays the role of a banker to itself.”
As Balagopal rightly argues, “Without a valid legal or financial basis, Government of India, by deciding to arbitrarily exclude amounts in the Public Account in assigning the net borrowing ceiling, has attempted to make serious inroads into the constitutional financial powers of the State Governments while at the same time seriously impairing the ability of the State to manage its liquidity from time to time.” This seems contemptible and is likely to lead to longer term conflicts in the federal relations between other BJP & non-BJP ruled states.
Another key bone of contention for state governments is how the Union Finance Ministry has now stipulated that along with balances maintained in the public Account of a state government, all borrowings of state government entities receiving budgetary support from the state budget will also be taken into consideration while setting the state’s borrowing limits.
While the Modi government has failed to consistently share its outlay plan of fiscal compensation (from GST and other sources) with most states, it is now imposing additional restrictions to minimise the states’ capacity to borrow to finance their needs, through different interpretations of existing constitutional provisions. It does not impose any such limits on its own borrowings via agencies set up by it.
The scope of Article 293(3) and (4) are limited to the state as defined under Article 1(1) of the Constitution. It cannot be extended to include the debt of government agencies, including companies and statutory bodies. It must also be emphasised that under the federal-state financial architecture in the Constitution, the constitutional body for making such recommendations is the Finance Commission.
What’s sacred: protecting state’s fiscal space
In managing the swelling fiscal deficit and public debt levels (including of fiscally weak states), the public expenditure composition and fiscal priorities must be more clearly understood, due to the different constitutional assignment of functions for the Union and state governments. Most redistributive expenditures, critical for welfare outcomes, are in the functional domain of states.
A contraction of such expenditure at the state level can have adverse distributional consequences, with a regression being already observed in access to education, healthcare and social security, particularly for vulnerable and marginalised sections. Welfare-driven expenditure needs aren’t part of ‘revdi’ politics but more about securing a government’s basic responsibility to its people.
State governments (irrespective of party affiliation) need all the support they can get at this point to either borrow more freely under a mutually agreed fiscal roadmap for their developmental needs, or be otherwise supported in managing their finances on their own, or through borrowing financed support offered by the Union. In both scenarios, fiscal cooperation and transparent decision-making are vital for protecting a state’s constitutionally safeguarded fiscal space, while enhancing macroeconomic stability.
Deepanshu Mohan is professor of economics and director, Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University.
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.
