Implication of Article 293 of the Constitution of India on State Borrowing
Exploring the kinds of conditions that the Centre can and should impose on State borrowing
Summary: This report recommends an alternative fiscal arrangement for effectively regulating sub-national borrowing, and identifies criteria and conditions which the Centre can impose under Articles 293(3) and (4) of the Constitution.
Article 293(4) of the Constitution enables the Centre to impose conditions on State borrowing when it is granting consent for the same under Article 293(3). This applies in cases where States are indebted to the Centre. The objective of this report is to examine the scope of conditions that are permissible under Article 293(4), and the kinds of conditions that ought to be imposed.
It first studies Article 293 in the context of subnational borrowing regulation in India, analysing the historical background and provisions thereof, particularly the scope of conditions which may be imposed under Article 293(4) from a legal perspective. It also surveys the existing institutional and legal architecture of subnational borrowing regulation in India. It then proceeds to analyse relevant policy considerations in this regard, focusing on the decentralisation dilemma. In light of this, the question of designing appropriate fiscal incentives for States and creditors is considered. In this context, the peculiarities of the Indian experience with subnational borrowing regulation is studied in order to determine the particular constraints, policy objectives, and concerns in this regard and to determine an appropriate path for reforms. The international practice on this subject is also reviewed, including various types of ex-ante and ex-post regulations employed across the world, as well as their relevance to the Indian context.
On the basis of this extensive study, the report recommends an alternative fiscal arrangement that India can employ to effectively regulate subnational borrowing, and lists out the potential criteria and conditions which may be imposed under Articles 293(3) and (4). It also provides recommendations to adequately cater to a scenario where States are no longer indebted to the Centre. The report also includes a study of the provisions contained in all State fiscal responsibility legislations.