Examine the key provisions of Article 293 of the Indian Constitution concerning State Governments’ borrowing powers.(13-01-2024)

·         State borrows within India.

·         Limits set by state legislature.

·         Consent required from Government of India.

·         Govt. of India can give loans.

Centralized Control:

·         Fiscal transfers breed moral hazard.

·         Populist fiscal tactics may be rewarded.

·         Dependency on transfers weakens budget constraints.

·         Past debt crises highlight regulatory need.

·         Independent institutions are vital.

·         Borrowing regulations can’t replace fiscal relations.

·         Sound fiscal relations need clear federal design.

Recommended Criteria/Conditions:

·         Modify consent mechanism gradually.

·         Introduce deficit range.

·         Incentivize credit ratings.

·         Ensure surplus cash utilization.

·         Impose transparent reporting rules.

·         State’s executive power extends to borrowing within India’s territory on Consolidated Fund security.

·         Limits set by state legislature; guarantees permitted within specified limits.

·         Consent required from Government of India if existing loan outstanding; Consent may have conditions.

·         Government of India can give loans, subject to Parliament-laid conditions; Charges on Consolidated Fund.

For Centralized Control:

·         Fiscal transfers breed moral hazard, encouraging subnational governments to shift excessive spending risks upwards.

·         Populist fiscal tactics may be rewarded, discouraging responsibility at the subnational level.

·         Dependency on intergovernmental transfers can weaken budget constraints, motivating subnational governments to control deficits.

·         Past subnational debt crises in decentralization highlight the need for effective regulatory frameworks.

Against Centralized Control:

• Independent institutions for fiscal discipline are vital; central control may lead to suboptimal decisions.
• Borrowing regulations alone cannot replace intergovernmental fiscal relations; Fiscal autonomy is crucial.
• Sound fiscal relations require well-designed federal relations; clear function definition is essential.

Recommended Criteria/Conditions:

·         Gradual modification of the consent mechanism for greater flexibility.

·         Introduction of deficit range instead of a ceiling.

·         Incentivizing credit ratings for SDLs and investments in the CSF and GRF.

·         Conditions to ensure surplus unused cash balances are utilized.

·         Imposing transparent and compliance-oriented reporting rules.