'Debts Of States Affect Country's Credit Rating' : AG Tells Supreme Court Defending Centre's Limits On Kerala's Borrowing Power

The Attorney General for India has filed a written note in the suit filed by the State of Kerala against the Union of India over the limits imposed on borrowing capacities.The State has contended that the Centre has imposed a Net Borrowing Ceiling(NBC) and has included borrowings made by the State Owned Enterprises to compute the NBC, which has limited the state's borrowing powers. The State also took objection to the Centre taking into account the liabilities arising from the Public Account of the States to compute the NBC.The State has challenged the Letters issued on 27.03.2023 and 11.08.2023 by the Ministry of Finance (Public Finance-State Division), Department of Expenditure, Government of India and the amendments made to Section 4 of the Fiscal Responsibility and Budget Management Act, 2003 through the Finance Act, 2018. It was contended that these letters and amendments interfere with the finances of the State and affect its fiscal autonomy guaranteed under Article 293 of the Constitution.'Debt of States affect the credit rating of the country'The AG's note stressed that public finance management is a national issue. "Debt of States affects the credit rating of the country. Moreover, default by any State in debt servicing would create reputational issues and will have domino effect endangering the financial stability of the whole of India," stated the note.If the State indulges in reckless borrowing to finance unproductive expenditure or poorly targeted subsidies, it will crowd out private borrowing from the market. “This will lead to increase in the borrowing costs of private industries and adversely impact the production and supply of goods and services in the market. Increases in the State's debt servicing liabilities as a consequence of higher borrowing by it will reduce the availability of funds for development, leading to impoverishment of people and loss of State income, and hence also loss of national income. It may also engender various social and other problems.,” the note added.States require Centre's permission to borrow from any sourceAG Venkataramani stated that all States require permission of the Centre to borrow from any source. While giving this permission, the Centre keeps in mind the overall objectives of macroeconomic stability of the country as a whole and fixes a borrowing limit for the State seeking its permission, under Article 293(4). The borrowing limits of States are fixed in a non-discriminatory and transparent manner guided by the recommendations of the Finance Commission.In this regard, the note brought attention to the Fiscal Responsibility and Budget Management Act of 2003. This was enacted to ensure that the Centre follows a prudent fiscal policy. The note, underscoring the objective of the Act, added., “It aimed to bring about prudential debt management and fiscal sustainability through limits on Central Government borrowings, debt and deficits, and greater transparency in fiscal operations of the Central Government.”To understand the background, it may be noted that the Kerala Government, in its suit, has also challenged amendments made to Section 4 of the Act through the Finance Act, 2018. The State has reasoned that the amendment, inter-alia, imposed a Net Borrowing Ceiling on the State by the Union. In response to this, the Union, in the instant note, has submitted:“Inclusion of a ceiling of general Government debt in the definition of General Government debt was important amendment in the Act in 2018 because the databases of international financial institutions like the IMF shows the general Government debt for all the countries and credit rating agencies or investors as well as lenders to a country considers not the federal but the general Government debt for their purposes of rating, investment or lending, as it actually indicates the level of risk inherent in an economy.”Borrowings from Public Accounts, borrowings through State Enterprises- innovative methods adopted by States to hide actual liabilitiesThe AG mentioned that the States often resorted to "innovative methods" to hide their actual liabilities by making borrowings from the Public Account or through State Owned Enterprises."To meet their rising needs for funds, States borrow heavily from their Public Account, which contains all public money received by or on behalf of the Government other than those credited ni its Consolidated Fund. However, the Government is more like a banker as the funds in Public Account, like provident funds, deposits and small savings, do not belong ot the Government and have to be paid back to its rightful owners. There are instances when States have purported to release Central grants to implementing agencies &then credited the amount to public account thus showing utilisation with no additional expense. Therefore, net increase in liabilities is considered a part of fiscal deficit of both the Union and the States."The AG critically commented on the tendency of States to...

'Debts Of States Affect Country's Credit Rating' : AG Tells Supreme Court Defending Centre's Limits On Kerala's Borrowing Power

Gyanvi Khanna

The Attorney General stated that the financial stress faced by Kerala is purely due to its financial mismanagement.

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