(General Studies II – Polity section – 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. Separation of Powers between various organs Dispute Redressal Mechanisms and Institutions.)
- The financial relationship between the Centre and States in India has often been contentious, particularly regarding borrowing powers. Article 293 of the Indian Constitution governs the borrowing powers of States and has recently come under scrutiny.
- The Centre’s imposition of borrowing restrictions, as seen in the case of Kerala, highlights tensions in cooperative federalism and raises questions about fiscal autonomy.
Understanding Article 293: Constitutional Provisions –
- Article 293 Clause (1): Allows States to borrow within India on the security of their Consolidated Fund.
- Article 293 Clause (3): Requires States to seek the Centre’s consent for borrowing if loans from the Centre are outstanding.
- Article 293 Clause (4): Grants the Centre broad discretion to attach conditions to its consent for State borrowing.
| Historical Context Article 293 is derived from Section 163 of the Government of India Act, 1935. However, a critical safeguard in the 1935 Act—prohibiting unreasonable delays or conditions by the Centre—was not incorporated into the Constitution, assuming post-Independence governance would operate cooperatively. |
The Problem: Challenges in Article 293 –
- Encroachment on State Fiscal Autonomy
- The Centre’s discretionary power under Clause (4) allows it to impose conditions that may hinder a State’s ability to address its financial needs.
- Recent restrictions, such as Kerala’s borrowing ceiling, have disrupted developmental and welfare activities, leading to political and legal conflicts.
- Lack of Transparency
- No clear guidelines govern the Centre’s decisions on granting or denying borrowing consent, leading to perceptions of bias and arbitrariness.
- Disruption of Cooperative Federalism
- Uniform restrictions fail to account for the diverse fiscal realities of different States, fostering mistrust between the Centre and States.
- Impact on Developmental Goals
- States facing borrowing constraints struggle to invest in essential sectors such as infrastructure, health, and education, undermining overall economic growth.
| Pandemic-Induced Borrowing Crisis (2020-2021) The COVID-19 pandemic exposed the limitations of Article 293, as States demanded higher borrowing flexibility to meet healthcare and welfare needs. However, the Centre linked increased borrowing permissions to structural reforms (e.g., urban reforms, electricity sector improvements), which States argued compromised their policy independence. |
Recommendations for Strengthening Article 293 –
1. Establish a Commission for Loan Disputes
- Proposal: Form a commission akin to the Finance Commission to resolve disputes regarding borrowing approvals.
- Rationale:
- Objectively evaluate the fiscal positions of both the Centre and States.
- Ensure decisions balance national fiscal consolidation goals with States’ developmental priorities.
2. Formulate Clear Guidelines for Clause (4)
A. Transparency in Decision-Making
- Define clear standards for approving or rejecting State borrowing requests.
- Publish criteria to enhance accountability and prevent arbitrary actions.
B. Consultative Process
- Mandate consultations with State governments before imposing borrowing restrictions.
- Foster a participatory approach that encourages trust and cooperation.
C. Equitable Treatment Across States
- Apply uniform borrowing terms and restrictions for all States, eliminating bias or favoritism.
- Tailor restrictions to each State’s financial health and developmental requirements.
D. Respect for Fiscal Autonomy
- Ensure that restrictions are reasonable and do not unduly constrain a State’s ability to manage its finances.
- Uphold the principles of cooperative federalism while maintaining fiscal discipline.
Implementation Strategy –
- Amend Article 293: Incorporate provisions ensuring transparency, consultation, and equitable treatment in borrowing decisions.
- Legislative Reforms: Enact laws to operationalize these guidelines and define the scope of the Centre’s powers under Article 293.
- Periodic Reviews: Conduct regular assessments by an independent body to evaluate the effectiveness of borrowing policies and address emerging challenges.
| Major Issues of Contention in Centre-State Fiscal Relations Borrowing Limits (Article 293): Central restrictions on State borrowings limit fiscal autonomy, often tied to stringent conditions.GST Compensation: Delays and disputes over revenue shortfalls under the GST regime strain Centre-State relations.Tax Devolution: States argue for a more equitable formula, citing imbalances in the Finance Commission’s recommendations.Centrally Sponsored Schemes: Tied grants restrict States’ flexibility in prioritizing local needs.Revenue from Natural Resources: Resource-rich States demand a greater share of revenues, citing inequitable distributions.Non-Divisible Revenues: The Centre’s rising reliance on cess and surcharges reduces the divisible pool, impacting State finances. |
| Article 293 is pivotal in determining the fiscal relationship between the Centre and States. However, its current framework often leads to conflicts. By introducing reforms such as a dispute resolution commission, clear guidelines, and transparency mechanisms, Article 293 can be strengthened to balance State autonomy with national fiscal objectives. |
