Union government arbitrarily restricts states’ fiscal freedom to borrow

KN Balagopal, the finance minister of Kerala, recently wrote a detailed letter to Union Finance Minister Nirmala Sitharaman in the context of the severe financial crisis currently facing state governments. The letter says that the Union Finance Ministry has arbitrarily, in the name of off-budget borrowing, reduced the government’s net borrowing limits by around Rs 4,000 crore.

According to Balagopal, in total, only the government of Kerala would have to face with a reduction of Rs 23,000 crore in the financial resources it has available to finance the current year’s budget, which would seriously affect the State’s ability to finance its social expenditures, including for programs targeting the poor, for housing, education and health.

The letter too raises serious issues with regard to the governance dynamics of federal relations between the Center and the State when it comes to granting autonomy to states like Kerala to manage their own budgetary situation vis-à-vis the Center, and with respect to the constitutional interpretation of clauses in Section 280, often invoked by finance commissions to regulate subnational borrowing.

by Balagopal letter says:

“Section 293(3) of the Constitution fetters the power of the state to contract loans. Under this provision, if there remains any part of a loan made to the government by the Indian government or for which the Indian government has given a guarantee, the government is prohibited from taking out “a loan” without the consent of the Union Government. The words “all ready” in this chapter should be read in light of the accepted canons of statutory interpretation. »

Simply put, the words ‘all ready’ in Article 293(3) should be read as all ready put forward by the Union government. This was reasonably well settled in the 1987 Supreme Court judgment Chandra Mohan vs. UP State (1966). Any different interpretation of the words “all ready” would go to the root of the federalist core of the nation, which is part of the basic structure of the constitution.

More importantly, Article 293(3) can be legitimately used for “to impose conditions on a request for a loan from a state government. This cannot be used to control or administer state government borrowing. Under the Constitution, these are matters which remain exclusively within the domain of state government.”

The coercive attitude of the Union government remains consistent in its treatment – ​​and interpretation of the clauses – with other states not governed by the BJP. Recently, the governments of Telangana and Tamil Nadu have also made similar comments on the need to preserve the autonomy of the state, guaranteed by the Constitution, to be able to manage its budgetary priorities (including for borrowings).

Section 283(2) gives the states the power to regulate its public account under the law passed by the state legislature. The States’ public accounts reflect their “internal financial transactions where constitutionally the state plays the role of banker to itself.” As Balagopal rightly argues:

“..Without a valid legal or financial basis, the Government of India, by deciding to arbitrarily exclude amounts from the public account when allocating the net borrowing limit, has attempted to seriously encroach on the constitutional financial powers of governments States while he was in power, at the same time seriously undermining the State’s ability to manage its liquidities on a timely basis.

This seems despicable and is likely to lead to longer term conflicts in federal relations between other BJP and non-BJP ruled states.

Another bone of contention for state governments is the fact that the (Union) Department of Finance has now stipulated that in addition to the balances maintained in a state government’s public account, all borrowings by State government entities receiving fiscal support from the state budget will also be considered when setting the respective state government borrowing limits.

While the Union government has failed to consistently share its tax offset plan (from GST and other sources) with most states, it is now imposing additional restrictions to minimize the ability to state to borrow to finance their needs, through differing interpretations of existing constitutional provisions. At the same time, it does not impose such limits on its own borrowings, taking into account the borrowings of the agencies it has created.

Further, the scope of section 293(3) and (4) is limited to the state as defined in section 1(1) of the constitution. It cannot be extended to debt of government bodies, including companies and statutory bodies. It should also be noted that under the federal-state financial architecture given in the constitution, the constitutional structure to make such recommendations is the Finance Committee.

Balagopal adds:

“None of the fourteen previous Finance Committees has made such a recommendation which could form the basis of the decision taken by the Department of Expenditure. It would (therefore) be wrong to use Article 293(3) interpretatively and selective to undermine the federal character of the Constitution.

Kerala Finance Minister KN Balagopal.

Protecting State Fiscal Space

To put it into context, one has to realize that for most of the last two years, despite a pandemic that has wreaked havoc on the fiscal position of almost every state, exacerbating the states’ public debt levels and that of the Union government, the Modi government has offered little direct support to the most affected state governments to meet their financial needs.

Any help offered was in the form of cash support with the option to borrow through the RBI or the Center should the need arise. As we also see here in Balagopal’s letter, the loss of (fiscal) autonomy of state governments is further likely to make state governments even more skeptical of any support offered by the Union, which is regrettable, given the worrying macro figures available on the Union and the State. -deficits, debt and other liabilities (see below).

Source: Indian Economic Statistics (RBI) Handbook and Union budget documents, 2012-23

Source: Indian Economic Statistics (RBI) Handbook and Union budget documents, 2012-23

Like Pinaki Chakraborty argue in EPW, on the history of fiscal consolidation between 2020-21 (the first year of the COVID-19 pandemic) and 2022-23, fiscal challenges for Union states have eased but remain present as they navigate the economic recovery in uncertain times. The reasons are many.

First, it’s difficult to predict the impact of the ongoing war between Russia and Ukraine on the fiscal situation as we move into fiscal year 2022-2023. Second, between 2020-21 and 2022-23 (BE), the reduction in the revenue deficit was substantial, from 7.3% to 3.8% of GDP. Third, compositionally, the revenue shortfall continues to represent more than 55% of the budget deficit and managing such a shortfall has some important considerations for revenue spending, namely (i) payments of interest and (ii) allocation under various central and central funding. sectoral schemes. In 2021-22 (RE), interest payments represent 25.7% of revenue expenditure and 39.14% of revenue revenue.

As a percentage of GDP, it fell from 3.1% to 3.6% of GDP between 2012-13 and 2022-23 (BE). This implies a corresponding reduction in fiscal space from primary spending to discretionary development spending. Within discretionary development spending, allocation changes within the basket of centrally sponsored schemes (CSS) receive significant attention after each budget.

However, the basic point, according to Dr. Chakraborty, is that resource flows to states in the form of CSS are still significant. The aggregate allowance under the central government and central sector sponsored schemes as per 2022-23 (BE) is 3.83 lakh crore and the cost of paying union government interest is 9, 56 lakh crore. Beyond allocations by scheme, it is also important to consider the allocation of CSS as a matter of macro-fiscal management at union and state levels, especially when it contributes to a revenue shortfall. high union government and binding state resources for matching. contributions, thus increasing the States’ deficit.

In the management of swelling budget deficit and public debt (including fiscally weak states), the composition of public spending and budget priorities need to be better understood, due to the different constitutional allocation of functions of Union and state governments. Most redistributive spending – essential for well-being outcomes – falls within the functional domain of states.

A contraction in such spending at the state level can have negative distributional consequences, with regression already being observed in state-level performance outcomes in access to education, health care and social security, especially for vulnerable and marginalized sections. Well-being spending needs are not part of ‘revdi’ political, but more on the guarantee of the fundamental responsibility of a government towards its people and the whole of the citizens.

Therefore, state governments (regardless of party affiliation) need all the support they can get at this stage to borrow “more freely” within a mutually agreed fiscal roadmap for their development needs, or be otherwise supported to manage their finances on their own. , or through loan-financed support offered by the Union Government.

In either scenario, fiscal cooperation and transparent operation are key to protecting government fiscal space and enhancing macroeconomic stability. There is no room for an “arbitrary” “ad hoc” decision-making mechanism, nor for selective partisan constitutional interpretations, which could trigger a more direct confrontation between state governments and the Ministry of Finance of the United States. Union in the future.

About Johnnie Gross

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