Article 293 and borrowing by states
In a recent report the CAG has mentioned that "KIIFB has taken foreign loans violating the Indian Constitution under Article 293 (1)".
• Article 293(4) of the Constitution enables the Centre to impose conditions on State borrowing when it is granting consent for the same under Article 293(3). This applies in cases where States are indebted to the Centre.
• Article 293 covers borrowing by State Governments. Under clauses (3) and (4) of Article 293, State Governments need to obtain the consent of the Centre for raising fresh loans in case they are indebted to the latter, and such consent may be granted, subject to certain conditions.
• A relevant question for consideration is, what is the scope of the conditions which may be imposed under clause (4) of Article 293. This clause has not been interpreted by courts so far, and it appears that different interpretations may be possible.
• Additionally, and unlike in the case of the Centre under Article 292, the borrowing power of States under this clause is applicable only “within the territory of India”.
• Therefore, from a plain reading of Article 293, it follows that the executive borrowing power of the State has been limited by making it subject to their legislatures, limiting it to within India, and subjecting it to the consent and conditions of the Centre when States are indebted to it.
• FRLs have been passed at the Central and State levels to regulate borrowing, which indirectly and directly has an effect on sub-national borrowing.
• Article 293(1) provides that State legislatures have the power to limit, by law, the State’s executive powers of borrowing and giving guarantees. It is worth noting that the Kerala High Court in Mathew v Union of India held that Article 293 is an enabling provision authorising state borrowing as well as laws regulating the same, but such limits on borrowing are not embodied in the Article itself. Clearly, by virtue of this constitutional provision, the states are empowered to pass their own FRLs
• Role of FC: FC-XIV in its report stated that it is expected the Central Government to enforce the fiscal roadmap outlined by it through the latter’s powers to approve state borrowings under Article 293(3). It does appear that the power conferred upon the Central Government under Article 293(3) is, indeed, being used for this purpose. Therefore, it may be said that indirectly, the Finance Commission plays an integral role in regulating subnational borrowing.
• The terms of reference of FC-XV require it to make recommendations regarding the conditions that the centre may impose on the states while providing consent under Article 293(3).
• Role of RBI: RBI evidently plays a very important role in the regulation of subnational debt. In this regard, it also coordinates with the Central Government. The centre in exercise of its powers under Article 293(3) indicates the state-wise net allocation of market borrowings to the RBI at the beginning of the financial year. Accordingly, the RBI decides the timing, tenure, and notified amounts of the SDLs.
What are the changes made to the borrowing limit of states?
For 2020-21, states had budgeted a gross borrowing of ₹7 lakh crore. Under the AatmaNirbhar Package in May 2020, states are allowed to increase their borrowing limits from 3 per cent to 5 per cent for 2020- 21. This is expected to provide extra resources of ₹4.28 lakh crore.
While the increase from 3 to 3.5 per cent of GDP is unconditional, which states can access after suitable revision of their FRLs (Fiscal Responsibility Legislations), the balance increase in market borrowing was initially made conditional.
As per the specific scheme notified by the Department of Expenditure, an additional 1 per cent of GDP will be provided in four tranches of 0.25 per cent, with each tranche linked to clearly specified, measurable and feasible reform actions in four areas: universalisation of ‘One Nation One Ration card’; ease of doing business; power distribution; and urban local body revenue reforms.
This is, however, expected to have a limited impact on the fiscal deficit of state governments that are likely to borrow a considerably lesser amount from the additional borrowing facility of 2 per cent of GSDP under the AatmaNirbhar Package.
On the whole, given states past track record of not being able to access market borrowings despite higher limits, and considering the meticulous process that states need to adhere to in order to get the clearance certificate from respective Ministries/ Departments with regard to achievement of the specified reform measures for the conditional part of the borrowing, they may be able to utilise only half of the additional borrowing given to them - conditional and unconditional on an average.
With borrowings financing about 90 per cent of states’ fiscal deficit, on an average, borrowing limits under Article 293 (3) act as soft constraint.
Thus, from the financing side, states’ combined GFD-GDP ratio is likely to remain around 4 per cent with a bias tilted to the upside, higher than the budgeted 2.8 per cent of GDP, albeit with state-wise variations.
Two borrowing options to meet GST Compensation requirement for 2020-21
The shortfall arising out of GST implementation (calculated at Rs 97,000 crore approximately) will be borrowed by States through issue of debt under a Special RBI Window coordinated by the ministry of finance.
The government will endeavour to keep the cost at or close to the G-sec yield, and in the event of the cost being higher, will bear the margin between G-secs and average of State Development Loan yields up to 0.5% (50 basis points) through a subsidy.
A special borrowing permission will be given by the government under Article 293 for this amount, over and above any other borrowing ceilings eligible under any other normal or special permission notified by the department of expenditure.
The borrowing under the Special Window will not be treated as debt of the state for any norms which may be prescribed by the Finance Commission etc.
The entire shortfall of Rs 2,35,000 crore (including the Covid-impact portion) may be borrowed by the states through issue of market debt.
The interest shall be paid by the states from their resources.
The principal on the amount under will, after the transition period, be paid from proceeds of the cess. The states will not be required to repay the principal from any other source.
Article 293 should not impinge on the federal character of the Constitution, beyond what is strictly required for the purposes of that provision, which is to protect the Central Government’s rights as a creditor, and to provide a mechanism for regulation of sub-national debt in the interest of maintaining macroeconomic fiscal stability.