Centre allows seven states to borrow more

• IAS NEXT, Lucknow
• 15, Nov 2021

The Finance Ministry has permitted seven States to borrow an additional ₹16,691 crore, linked to their having met specified capital expenditure targets in the June to September quarter.

Background:

• States were required to achieve at least 45% of their capex targets for the year by the second quarter to be eligible for a nod to raise incremental borrowings from the market.
• Chhattisgarh, Kerala, Madhya Pradesh, Meghalaya, Punjab, Rajasthan and Telangana had met the targets for the first half of the year.

Why do states need the centre’s permission while borrowing? Is it mandatory for all states?

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.

• This consent can also be granted subject to certain conditions by virtue of Article 293(4).
• 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.

Does the Centre have unfettered power to impose conditions under this provision?

Neither does the provision itself offer any guidance on this, nor is there any judicial precedent that one could rely on.

• Interestingly, even though this question formed part of the terms of reference of the 15th Finance Commission, it was not addressed in its interim report.

So, when can the centre impose conditions?

The Centre can impose conditions only when it gives consent for state borrowing, and it can only give such consent when the state is indebted to the Centre. 

Why are such restrictions necessary?

• 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.