Daily Current Affairs : 21-December-2023

In a recent development, the Finance Ministry has paved the way for states in India to access approximately ₹2.04 lakh crore in additional borrowings beyond their net borrowing limits for the fiscal year. This move aims to empower states and enhance their financial capacity, with 22 states already granted permission to raise nearly ₹61,000 crore, surpassing their net borrowing ceilings set at 3% of Gross State Domestic Product (GSDP).

Reasons Behind the Extension

The key factor contributing to this additional borrowing capacity is the fulfillment of pension liabilities by states through contributions to the National Pension System (NPS). Moreover, states have the potential to raise over ₹1.43 lakh crore based on recommendations from the Ministry of Power, specifically tied to power sector reforms.

Borrowing Rules Defined

The borrowing rules for states in India are structured with clarity. The normal net borrowing ceiling is set at 3% of GSDP for the fiscal year 2024, in accordance with the Fifteenth Finance Commission’s recommendation. States also receive an extra 0.5% of GSDP in borrowing capacity as a performance-based incentive for power sector reforms. This additional provision allows them to potentially borrow ₹1.43 lakh crore for the fiscal year 2024, as per the Ministry of Power’s guidance.

Constitutional Framework

Article 293(3) of the Constitution plays a pivotal role in regulating state borrowings. It stipulates that a state cannot raise a loan without the consent of the Government of India if any part of a previous loan from the central government remains outstanding. This constitutional provision ensures a disciplined and coordinated approach to state borrowing, safeguarding the overall financial stability of the nation.

Important Points:
  • Additional Borrowing Capacity:
    • States in India granted access to ₹2.04 lakh crore beyond their net borrowing limits.
    • 22 states already permitted to raise ₹61,000 crore, exceeding the 3% GSDP ceiling.
  • Reasons Behind Extension:
    • States eligible for additional borrowing if they fulfilled pension liabilities via contributions to the National Pension System (NPS).
    • Potential for states to raise ₹1.43 lakh crore based on Ministry of Power’s recommendations tied to power sector reforms.
  • Borrowing Rules Defined:
    • Normal net borrowing ceiling for states set at 3% of GSDP for fiscal year 2024 (Fifteenth Finance Commission’s recommendation).
    • Additional 0.5% of GSDP borrowing capacity as a performance-based incentive for power sector reforms.
    • States empowered to borrow ₹1.43 lakh crore for FY24 based on Ministry of Power’s recommendation.
  • Constitutional Framework:
    • Article 293(3) constitutionally regulates state borrowings.
    • States cannot raise a loan without the consent of the Government of India if any part of a previous loan from the central government remains outstanding.
  • Overall Implications:
    • The move aims to empower states financially, enhancing their capacity to meet fiscal challenges.
    • Constitutional provisions ensure a disciplined and coordinated approach to state borrowing, contributing to the overall financial stability of the nation.
Why In News

States in India may have the option to access around ₹2.04 lakh crore in additional borrowings beyond their net borrowing limits for the year, as disclosed by the Finance Ministry, providing them with much-needed fiscal flexibility during challenging economic conditions.

MCQs about Unlocking Additional Borrowing for States in India

  1. What is the key factor contributing to states’ access to additional borrowing capacity in India?
    A. Implementation of Goods and Services Tax (GST)
    B. Fulfillment of pension liabilities through contributions to the National Pension System (NPS)
    C. Agricultural sector reforms
    D. Increase in export quotas
    Correct Answer: B. Fulfillment of pension liabilities through contributions to the National Pension System (NPS)
    Explanation: States can access additional borrowing if they fulfill pension liabilities through contributions to the National Pension System (NPS).
  2. What is the primary purpose of the additional borrowing capacity granted to states by the Finance Ministry?
    A. Funding healthcare initiatives
    B. Boosting agricultural production
    C. Enhancing financial capacity of states
    D. Supporting education reforms
    Correct Answer: C. Enhancing financial capacity of states
    Explanation: The additional borrowing capacity aims to enhance the financial capacity of states.
  3. Which constitutional provision regulates state borrowings and mandates consent from the Government of India for raising loans?
    A. Article 370
    B. Article 293(3)
    C. Article 356
    D. Article 311
    Correct Answer: B. Article 293(3)
    Explanation: Article 293(3) constitutionally regulates state borrowings and stipulates that states cannot raise a loan without the consent of the Government of India.

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