Why in News?

• Kerala has approached the Centre seeking urgent measures, including expansion of its borrowing limit, a special assistance of Rs. 3,224.61 crore for capital investment, and payment of arrears for tackling resource constraints faced by it.

Background:

• He Reserve Bank of India in a report titled ‘State Finances: A Risk Analysis‘ said states’ fiscal positions deteriorated sharply in 2020 with a sharp decline in revenue, an increase in spending and a sharp rise in debt to GSDP ratios.
• Based on the debt to GSDP ratio in 2020-21, the RBI found the debt burden in 10 states including Kerala quite high.
• Kerala’s debt during the financial year 2021-22 was estimated to be at 37 per cent and is expected to be 2 per cent during the current financial year, data showed.

Kerala’s stand:

• Finance minister of Kerala said, there were no “lapses in finance management.”
• Centre had taken powers of the states to collect taxes: As part of GST, the central government has taken all powers to collect taxes from state governments and also decreased the states’ share. The state lost a minimum of ₹ 12,000 crores.

Basics about borrowing of states:

Constitutional provisions:

• Article 293 in The Constitution deals with the Borrowing by States.
• It says: The executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits, and to the giving of guarantees within such limits, if any, as may be so fixed.

Why states need Centre’s permission while borrowing?

• 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.
• 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.

Need for such restrictions:

• 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.