The Centre has presented its defense in the Supreme Court regarding its authority to limit the borrowing capacity of states, citing concerns that reckless borrowing by states could adversely impact the national sovereign rating and jeopardize the integrity of the federal structure in the country.
Attorney-General R. Venkataramani emphasized in a written note that if states engage in imprudent borrowing to finance unproductive expenditures or poorly targeted subsidies, it could lead to a crowding out effect on private borrowing from the market. This, in turn, could escalate borrowing costs for private industries, affecting the production and supply of goods and services in the market.
Furthermore, Venkataramani highlighted that increased debt servicing obligations resulting from higher borrowing by states could diminish funds available for development initiatives, ultimately leading to societal impoverishment, loss of state and national income, and potential social challenges.
The attorney-general warned that treating public finance as a state-specific rather than a national issue could undermine the entire federal structure of the country.
Venkataramani’s defense comes in response to a suit filed by Kerala last year, alleging that the NDA government, for political reasons, had curtailed the state’s borrowing capacity to Rs 15,390 crore, effectively halving its borrowing limit. Kerala argued that this action violated principles of fiscal federalism.
The amendments made to Section 4 of the Fiscal Responsibility and Budget Management Act, 2003, in 2018 empowered the Central government to impose restrictions on state borrowing capacities.
Venkataramani justified the decision to impose the cap, citing Kerala’s poor fiscal discipline as one of the worst-performing states in this regard. He asserted that the Centre was acting within its constitutional authority to enforce such limitations.