- Supreme Court declined any interim relief to Kerala to borrow additional funds during current fiscal year.
- SC also refused to stay the operation of two letters issued by the Finance Ministry in 2023 and certain changes made to FRBM Act 2003 in 2018 that impose borrowing restrictions on States.
- Kerala had filed a suit in the Supreme Court under Article 131 of the Constitution which empowers the Supreme Court to settle disputes between a State Government and the Union Government in India.
- Kerala accused the central government of arbitrarily imposing a Net Borrowing Ceiling (NBC) on the State which led to the financial crisis.
Net Borrowing Ceiling (NBC)
- It imposes a limitation on the borrowing of a State from various sources including open market borrowings.
- On the recommendation of the 15th Finance Commission, the NBC for States is fixed at 3% of the Gross State Domestic Product (GSDP) or ₹8,59,988 crore in absolute terms for the Financial Year (FY) 2023-24.
- The Union government decided to deduct liabilities arising from the public account of the States to reach such a limit.
- Additionally, borrowings by State-owned enterprises, where the principal and/or interest are paid from the Budget or through assignment of taxes, cess or any other State revenue, are also deducted from the NBC.
- NBC has been imposed by invoking the powers of Centre under Article 293(3).
What does the Constitution says about Fiscal autonomy of States
- Article 293 permits States to borrow only from within the territory of India on a guarantee from the consolidated fund of the State and within such limits as outlined by the legislatures of each State.
- The subject “Public Debt of the State” is mentioned in Entry 43 of the State List in the Seventh Schedule which means that the Parliament cannot legislate or administer upon such matters.
- If a state needs to borrow from the Centre, then such a transaction will be regulated under FRBM Act 2003.
- Under Article 293(3), the State has to seek consent of the Centre to raise any loan, if any part of the previous loan extended by the Centre is outstanding.
- Article 266(2) says that the money collected by the Central or State government which does not pertain to the consolidated fund can be brought under the head of ‘public accounts.’ All activities pertaining to such public accounts fall squarely within the domain of the State legislature.