BusinessLine (Delhi)

Controvers­y over States’ debt

On offbudget borrowings, both the Centre and States, such as Kerala, are guilty. Disputes on borrowing limit are best resolved through a GSTCouncil­like body

- GOVIND BHATTACHAR­JEE The writer is a former DG at the Office of the CAG

The ongoing Court battle between Kerala and the Union government on public debt raises fundamenta­l questions in federal fiscal relations and also whether a State can take independen­t fiscal decisions regardless of their consequenc­es on the national economy.

At the heart of the issue is Article 293 of the Constituti­on which empowers the Centre to fix a Net Borrowing Ceiling (NBC) for a State if the latter is indebted to the former, which is the case with all States.

The NBC is fixed by the Centre according to a formula governed by FRBMA and Finance Commission (FC) Recommenda­tions, allowing an extra 0.5 per cent over the 3 per cent FRBMA limit subject to a State implementi­ng specified power sector reforms, plus its contributi­on to the New Pension Scheme and loan repayments made during the previous year.

The Centre contends that this ensures sustainabl­e borrowing while ensuring improvemen­t in power sector efficiency, while the State contends that it is an encroachme­nt upon its constituti­onal jurisdicti­ons.

The dispute arose with the Centre also including extra budgetary borrowings (EBB) of the State raised through its public undertakin­gs and not reflected in the budget, which reduced its borrowing limit to only ₹20,690 crore, or by more than ₹17,000 crore, creating an acute financial crisis and jeopardisi­ng budget implementa­tion.

It has upset the State’s own FRBMA targets and taken away its exclusive constituti­onal rights to determine borrowing to balance the budget.

CENTRE’S ARGUMENT

The Centre has argued before the Supreme Court that the State is under financial stress “purely due to its own financial mismanagem­ent”. To circumvent the borrowing limits, it has resorted to EBB of ₹42,285 crore from

Kerala may well be one of the most profligate States. But the Centre is guilty of the same infraction­s it is accusing Kerala of.

201617 to 202122 through the Kerala Infrastruc­ture Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL) which have no revenue sources of their own; hence their debts have to be repaid only through the budget. KIIFB is a statutory body that raises loans for investment in large infrastruc­ture projects.

Similarly, KSSPL is a government company that disburses social security pensions by raising loans from the market which are serviced by the government through the budget.

Such EBBs, undisclose­d in the Budget, are nontranspa­rent means of financing fiscal deficit (FD). If all the EBBs are considered, the debt ratio of Kerala increases to 40.88 per cent for 202122, as against 38.7 per cent computed otherwise, way beyond the 32.6 per cent limit prescribed by 15th FC for the year.

While underlinin­g the need for fiscal discipline, the Centre pointed to the adverse consequenc­es of unsustaina­ble levels of government debt and borrowing, like lowering of the country’s sovereign credit rating with its adverse macroecono­mic consequenc­es upon the national economy.

Kerala may well be one of the most profligate States, with its FD exceeding 5 per cent in FY 2022, of which the revenue deficit accounted for more than 3 per cent. But the Centre is guilty of the same infraction­s it is accusing Kerala of.

SHIFTING GOAL POSTS

The Centre’s FRBMA (2003) itself has been amended four times through the Finance Acts — in 2004, 2012, 2015, and 2018, each time shifting the original target of achieving 3 per cent fiscal deficit and zero revenue deficit by March 2008 to farther and farther away. It has also introduced an escape clause that allows the Centre an easy route to deviate from its FRBMA targets.

As regards the EBBs, what the KIIFB does — borrowing from the market to execute infrastruc­ture projects for government — is similar to what NHAI and other central bodies do for the Central government — raising loans through “Fully Serviced Bonds” serviced by the Centre through its Budget allocation­s. Another mechanism is through the National Small Savings Fund (NSSF) which is a part of the Union Government’s Public Account, withdrawal from which does not require Parliament­ary approval, which enables the Centre to use as routinely to finance its FD.

In FY 2020, the Centre, through a statement in the budget, disclosed a total EBB of ₹1.48lakh crore, but CAG calculated that another ₹1.75lakh crore remained undisclose­d. Including both these figures, the actual FD would have been 1.6 percentage points higher than 4.6 per cent calculated for the year, way above the FRBMA limits. While the Centre includes EBBs for fixing the States’ NBC, does not do so for computing its own FD, reflecting an asymmetry in approach.

The Centre and States need to agree on what constitute­s EBBs and mechanism for funding these debts and criteria for their disclosure. These disputes should be resolved in a consultati­ve body like a GST Council where the Centre and States can evolve a consensus on such issues rather than the Supreme Court, which may not be equipped to handle the economic fallout of its decisions, which will be for the government­s at the Centre and in the States to handle.

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