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Centre’s Decision on State Borrowing

Why is it in the news?

  • The Finance Ministry has made a significant decision to permit states to access an additional 04 lakh crore in borrowings. This decision goes beyond the usual net borrowing limits set for states for the current fiscal year.
  • As part of this decision, the Centre has approved an extra borrowing of ₹60,876.80 crore for states. This amount is in addition to their net borrowing ceilings, which are typically set at 3% of the Gross State Domestic Product (GSDP).

More about the news

  • The additional borrowing is not a generic allowance but has a specific purpose. In this case, 22 states are granted this supplementary borrowing to address pension liabilities under the National Pension System (NPS). The NPS has been overseeing the management of government employee retirement savings since its inception in 2004.
  • States typically operate under a net borrowing ceiling that is fixed at 3% of the Gross State Domestic Product (GSDP). For the fiscal year 2023-24, this ceiling is equivalent to ₹8,59,988 crore, a figure recommended by the Fifteenth Finance Commission.
  • States are provided with an additional 0.5% of GSDP in borrowing capacity. This incentive is tied to performance-based criteria related to power sector reforms. As per the power ministry’s recommendation for the fiscal year 2023-24, states are eligible to borrow ₹43 lakh crore under this provision.


Constitutional Provisions

  • The decision regarding state borrowing aligns with constitutional provisions, notably Article 293(3). This article stipulates that a state may not raise any loan without the consent of the Government of India if there is still any outstanding part of a loan previously made by the central government or its predecessor.
  • In practice, the Centre exercises its authority under Article 293(3) while considering the recommendations and guidance provided by the Finance Commission. This reflects a cooperative and coordinated approach between the central and state governments in managing fiscal matters.

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