Ceiling on borrowing by States

The Supreme Court will assess states’ rights to increase borrowing by States beyond the cap set by the Central Government.

• This review is in response to a suit filed by the Kerala government, questioning the constitutionality of these restrictions.
• The Supreme Court will assess states’ rights to increase borrowing by States beyond the cap set by the Central Government.

About Net Borrowing Ceiling (NBC):

• The Net Borrowing Ceiling (NBC) is a cap on the amount that states can borrow from various sources, including the open market.
• The Central Government calculates this ceiling by deducting state liabilities, including those from public accounts.
• Borrowings by state-owned enterprises, where repayment is covered by the state budget or revenue, are also subtracted from the NBC.
• For FY 2023-24, the NBC for states is set at 3% of Gross State Domestic Product (GSDP), as recommended by the 15th Finance Commission.

Impact:

• Violation of Principles of Federalism: Fiscal decentralization is a cornerstone of federalism, ensuring financial power is devolved to regional and local governments for effective governance.
• Impact on Developmental Expenditure: States’ spending on socio-economic services, crucial for development, might be constrained due to the borrowing cap.
• Limited Revenue Sources: States have limited power to levy taxes, as the authority largely lies with the Union. Additionally, proceeds from cess and surcharge are not shared with the states, further restricting their financial autonomy.

State Borrowing Provisions:

• Article 293 of the Constitution grants states the power to borrow within India, but not from abroad, secured against the Consolidated Fund of the State.
• The Centre can extend loans or guarantees for state loans.
  • However, if a state has outstanding debt, it cannot raise new loans without the Centre’s consent.

Ref: Source

Frequently Asked Question: