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Centre allows five states to Borrow

Topics Covered: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

Centre allows five states to Borrow:


Context:

The Centre has permitted five States to borrow an additional ₹9,913 crore through open market borrowings to meet expenditure requirements amid falling revenues due to the COVID-19 crisis.

  • These States are A.P., Telangana, Goa, Karnataka and Tripura.

borrowing

What’s the issue now?

The permission was accorded after these States met the reform condition of implementation of ‘One Nation One Ration Card’ system.

Background:

The Centre had, in May, allowed additional borrowing limit of up to 2% of Gross State Domestic Product to States for FY21 with certain conditions.

Let’s understand the Basics here:

Why states need 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.

Conclusion:

This means that in the present case, the Centre was not justified in requiring states to join the One Nation One Ration Card scheme by exercising its power under Article 293(4). After all, this has no direct bearing on a state’s fiscal health or on macroeconomic stability, and encroaches upon the legitimate domain of states.

Given these limitations, if the Centre desired to extend its One Nation One Ration scheme throughout the country, it should have opted for building consensus with reluctant states instead of compelling them through this route.

InstaLinks:

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 (3).
  5. When can the centre impose conditions on states?

Mains Link:

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

Sources: the Hindu.