Centre-State Borrowing Conflict

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The Centre’s net borrowing ceiling curtails States' borrowing power, impacting financial autonomy and prompting constitutional scrutiny.

In 2023, the central government imposed a "Net Borrowing Ceiling" (NBC), capping States' borrowing at 3% of their projected GDP, covering all sources, including loans and liabilities. This has restricted States like Kerala from financing development initiatives, leading to legal disputes over the Centre's encroachment on State autonomy under Article 293 of the Constitution. Kerala argues that this cap infringes on the State's guaranteed financial independence. Article 293 allows States to borrow but requires Central consent when seeking guarantees on the Consolidated Fund. The Centre’s NBC and restrictions have constrained States’ financial flexibility, complicating their response to fiscal needs. Strengthening Article 293 by aligning it with cooperative federalism could prevent conflicts over borrowing rights. Additionally, fiscal prudence under the Fiscal Responsibility and Budget Management (FRBM) Act aims to control debt levels by targeting fiscal and revenue deficits. However, the NBC and strict deficit controls can limit States’ capacity to manage revenue shortfalls and fund essential services. Recommendations include amending Article 293 to balance national and State interests, promoting a cooperative financial relationship.