THE CONTEXT: The debate surrounding Kerala’s protest of the Centre’s imposition of a Net Borrowing Ceiling (NBC) underscores a growing concern over the erosion of fiscal federalism in India. This brings into the limelight the conflict between the constitutional autonomy of states to manage their finances and the Centre’s regulatory mechanisms intended to ensure fiscal discipline and transparency.

THE ISSUES:

• Net Borrowing Ceiling (NBC): The NBC is a limit set by the Centre on the total amount that states can borrow from all sources, including open market operations and loans from state-owned enterprises. Specific to Kerala, the NBC now includes debts incurred by the Kerala Infrastructure Investment Fund Board (KIIFB), which funds infrastructure projects through extra-budgetary routes. Including KIIFB’s debts under the NBC restricts Kerala’s financial autonomy, directly impacting its ability to fund welfare schemes and pensions.
• Constitutional Limits and Fiscal Federalism: Article 293(3) requires states to seek the Centre’s permission to borrow if they have any outstanding federal loans. The imposition of the NBC by the Centre is under this article, which Kerala contends is a violation. Kerala’s legal stance to move to the Supreme Court suggests that the Centre’s decision infringes on the state’s constitutional rights to manage its public debt (Entry 43, State List) and public accounts (Article 266(2)).
• State Fiscal Responsibility and Transparency: Kerala Fiscal Responsibility Act, 2003 mandates reducing the fiscal deficit to 3% of Kerala’s Gross State Domestic Product (GSDP) by 2025-26. Kerala’s fiscal deficit has been reported at 2.44% and the revenue deficit at 0.88% of the GSDP, indicating a responsible fiscal approach compared to the Centre’s fiscal deficit, pegged at 5.8% for 2023-24.
• Impact on Governance and Welfare Implications: The restricted borrowing capacity directly impacts the state’s social obligations, such as funding pensions and welfare programs essential for balanced socio-economic development. The KIIFB’s innovative financial strategy for infrastructure development in Kerala is a model of how state autonomy can be effectively utilized for the public good, which NBC hinders.
• Assessment of Federal Dynamics: The shift in Federal Structure by transitioning from cooperative federalism towards a more ‘annihilative federalism,’ where the Centre’s stringent controls over state finances limit the states’ operational independence. Examination of this shift in India’s federal structure reflects on the long-term implications on centre-state relations and the principle of subsidiarity.
• Borrowing Restrictions: The 15th Finance Commission recommended that 41% of the net proceeds of Union taxes be shared with the states. However, the Centre’s decision to include off-budget borrowings done by states while deciding their borrowing limits led to a sharp decrease in such borrowings. This has been seen as a restriction on states’ ability to borrow and manage their finances, with Kerala particularly affected due to the inclusion of the debt of KIIFB in the NBC.

THE WAY FORWARD:

• Seek Judicial Clarification: Given that Kerala has moved the Supreme Court on the matter, one solution is a judicial review of the constitutional validity of the NBC with respect to Article 293(3) and Article 266(2). The Court’s interpretation could resolve disputes regarding the constitutional limits of the Centre’s authority over state borrowing.
• Review of 15th Finance Commission Recommendations: The issues stemming from interpreting the 15th Finance Commission’s recommendations could be re-examined. States can engage with the Finance Commission or the Union Finance Ministry to advocate their concerns and seek a more nuanced approach that doesn’t infringe on states’ fiscal autonomy while upholding fiscal sustainability.
• Legislative Action: Parliament could consider enacting legislation or amending existing laws (subject to constitutional limits) to clarify the scope of central oversight on state borrowings. This should respect the balance of fiscal federalism and be designed after extensive consultations with states.
• Strengthen Cooperative Federalism: Regular high-level meetings between the Centre and States, through forums like the GST Council or a specially convened fiscal policy council, could help facilitate dialogue. These meetings would aim to negotiate borrowing limits and ensure that states have enough financial leeway to meet their obligations.
• Promote Fiscal Responsibility at the State Level: States can take proactive steps to strengthen their fiscal management, as Kerala has done through the Kerala Fiscal Responsibility Act. By setting clear deficit targets and budget management practices, states can demonstrate their commitment to fiscal prudence, potentially increasing their negotiating power with the Centre.
• Build a Consensus on Public Account Handling: The issue of including public account withdrawals within the NBC could be addressed by building a broader consensus among all states, which can then be presented to the Centre in a united front to exclude such transactions from the borrowing limits.
• Economic Reforms and Growth Promotion: Widening the tax base through economic reforms, boosting the investment climate, and promoting growth in the state’s own-source revenue can be sustainable ways of ensuring sufficient funds for state spending without reliance on borrowings.

THE CONCLUSION:

Kerala’s challenge against the Centre’s Net Borrowing Ceiling (NBC) imposition highlights a significant constitutional dispute over fiscal federalism and state autonomy in financial management. The state argues that the Centre’s restrictions on borrowing, including debts of state-owned enterprises and public account balances, infringe upon its constitutional rights. This legal battle underscores the tension between central oversight and state fiscal independence, potentially reshaping the dynamics of federal-state financial relations in India.

UPSC PAST YEAR QUESTION:

Q.1 Though the federal principle is dominant in our Constitution and that principle is one of its basic features, but it is equally true that federalism under the Indian Constitution leans in favour of a strong Centre, a feature that militates against the concept of strong federalism. Discuss. (2014)

Q.2 The concept of cooperative federalism has been increasingly emphasized in recent years. Highlight the drawbacks in the existing structure and the extent to which cooperative federalism would answer the shortcomings. (2015)

Q.3 How far do you think cooperation, competition, and confrontation have shaped the nature of federation in India? Cite some recent examples to validate your answer. (2020)

Q.4 Public expenditure management was a challenge to India’s government in the context of budget-making during the post-liberalization period. Clarify it. (2019)

Q.5 What are the reasons for introducing the Fiscal Responsibility and Budget Management (FRBM) Act, 2003? Discuss its salient features and their effectiveness critically. (2013)

MAINS PRACTICE QUESTION:

Q.1 Critically examine the contention between the State of Kerala and the Centre over the imposition of a Net Borrowing Ceiling (NBC) concerning Article 293(3) of the Indian Constitution. Analyze the implications of such a ceiling on fiscal federalism and state autonomy, along with its potential impact on state welfare schemes and infrastructure projects.

SOURCE:

https://www.thehindu.com/opinion/op-ed/the-severe-erosion-of-fiscal-federalism/article67818283.ece

THE CONTEXT: The budget reflects the government’s narrative of “transformative growth” during the 2014-24 decade under the Modi administration. However, the focus of welfare schemes and fiscal consolidation may not align with actual spending and resource allocation. The fiscal deficit for 2023-24 is projected to be 5.8% of GDP, marginally below the budgeted level.

THE ISSUES:

• Introduction of an interim budget: The Interim Budget for 2024-25 was presented due to the upcoming elections, as Prime Minister stated. The Interim Budget is seen as a vote-on-account, which could be perceived as an attempt to influence voters before the elections. This indicates that the budget may not fully reflect the government’s long-term vision and plans.
• “Transformative growth” narrative: The Economic Survey presented in the budget portrays 2014-2024 as a decade of “transformative growth.” It suggests that previous periods of growth were inadequate, either due to unaddressed structural challenges or unsustainable credit booms.
• Focus on welfare schemes: The Interim Budget speech primarily focuses on various welfare schemes attributed to the Prime Minister in housing and food. However, apprehensions are raised about these schemes’ implementation and effectiveness, given the discrepancies between the claims and the actual expenditure. For instance, the total food subsidy has fallen from ₹5,41,330 crore in 2020-21 to ₹2,88,060 crore in 2021-22 and a projected ₹2,87,194 crore in 2023-24.
• Fault lines in spending: A significant deviation exists between the actual expenditure and the revised estimates for schemes such as MGNREGA and PM-KISAN. The budgeted expenditure for MGNREGA was ₹1,57,545 crore for 2023-24. The revised estimates are placed at a higher ₹1,71,069 crore. However, the actual expenditure till December 2023 amounted to only ₹1,07,912 crore, or 63% of the total projected in the revised estimates. The budgeted expenditure for the PM-KISAN scheme was ₹1,15,532 crore for 2023-24. The revised estimate is projected at ₹1,16,789 crore. The actual expenditure till December 2023 was ₹70,797 crore or 61% of the revised estimate.
• Pre-election blitz: There are two possible interpretations: either the finance minister is inflating the revised estimates to support farmers and rural workers, or the government plans to initiate pre-election spending to gain political advantage.
• The decline in food subsidies: Despite claims of expanding food support, the data made available by CGA points out that the total food subsidy has declined from 2020-21 to 2021-22 and is projected to decrease further in 2023-24. For instance, the total food subsidy has fallen from ₹5,41,330 crore in 2020-21 to ₹2,88,060 crore in 2021-22 and a projected ₹2,87,194 crore (RE) in 2023-24. This raises concerns about the government’s commitment to food security.
• Revenue projections and fiscal deficit: The government claims to manage its receipts and keep the fiscal deficit below the budgeted level. There is an expected increase in non-tax revenue receipts, mainly driven by income from dividends and profits. The government expects to raise its non-tax revenue receipts by 25% relative to the budget, with income from dividends and profits slated to rise from ₹99,913 crore in 2022-23 to ₹1,54,407 crore in 2023-24 (RE). However, uncertainties remain regarding the realization of disinvestment proceeds.

THE WAY FORWARD:

• Enhanced Transparency and Accountability: Implement more rigorous and transparent accounting and reporting practices to ensure that budget estimates, revised estimates, and actual expenditures are accurately reported and easily understandable. Regular audits and public disclosures of government spending can help maintain transparency and accountability, ensuring funds are utilized as intended.
• Addressing Deviations in Spending: Close monitoring of implementing schemes like MGNREGA and PM-KISAN to ensure that allocated funds are spent within the financial year and reach the intended beneficiaries. Establishing a real-time monitoring system and a dashboard accessible to the public can help track the progress of fund utilization and scheme implementation.
• Focusing on Effective Implementation of Welfare Schemes: Conduct impact assessments of welfare schemes to evaluate their effectiveness in achieving their goals, such as poverty alleviation and employment generation. Based on the assessments, refine and redesign schemes to make them more effective. Engage with stakeholders, including beneficiaries and local governments, for feedback and suggestions for improvement.
• Balancing Welfare Spending and Fiscal Prudence: While welfare spending is crucial, it is equally important to maintain fiscal discipline to ensure economic stability. The government could explore innovative financing mechanisms, such as public-private partnerships (PPPs) for infrastructure projects, to reduce the fiscal burden while continuing to invest in critical areas.
• Strengthening the Food Security System: Address the concerns regarding the decrease in food subsidies and ensure that the National Food Security Act’s objectives are met effectively. Enhance the efficiency of the Public Distribution System (PDS) through technology integration to reduce leakages and ensure the benefits reach the eligible population.
• Rationalizing Non-Tax Revenue Expectations: Set realistic targets for non-tax revenues, including dividends and profits from PSUs and disinvestment proceeds, to avoid overestimation that could lead to fiscal slippages. A strategic approach to disinvestment focuses on enhancing the value of PSUs before disinvestment and ensuring that disinvestment proceeds are used for productive purposes, such as infrastructure development.
• Promoting Sustainable Growth: Focus on addressing structural economic challenges to ensure sustainable and inclusive growth. Invest in education, healthcare, and skill development to improve human capital and research and development (R&D) to foster innovation, laying the foundation for long-term economic growth.
• Fiscal Prudence: The government could focus on maintaining fiscal discipline by avoiding pre-election spending sprees that could undermine the fiscal health of the economy.
• Public Engagement: Engaging the public and stakeholders in the budget process could help set priorities that reflect the needs and aspirations of the population, leading to more effective and accepted fiscal policies.

THE CONCLUSION:

The interim Budget for 2024-25 reflects a eulogy of the two governments of the last ten years, focusing on welfare schemes and infrastructure spending. However, a closer look at the actual expenditure figures reveals discrepancies and potential pre-election spending blitz. The government’s claims of pro-poor initiatives and fiscal prudence may not align with reality. The impact of these strategies on voters and the upcoming elections remains to be seen.

UPSC PAST YEAR QUESTIONS:

Q.1) Public expenditure management is a challenge to India’s government in budget-making during the post-liberalization period. Clarify it. (2019)

Q.2) One of the intended objectives of Union Budget 2017-18 is to ‘transform, energize and clean India’. Analyse the measures proposed in the Budget 2017-18 to achieve the objective. (2017)

MAINS PRACTICE QUESTION:

Q.1) Discuss the implications of the Interim Budget 2024 on welfare schemes, infrastructure spending, and fiscal deficit.

SOURCE:

https://www.thehindu.com/opinion/lead/interim-budget-2024-in-campaign-mode/article67801178.ece