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Kerala’s Suit Against State’s Borrowing Capacity

Why is it in the news?

  • Supreme Court seeks Centre’s response on Kerala’s suit against state’s borrowing capacity.

 More about the news

  • Kerala government challenged 2018 amendments to the Fiscal Responsibility and Budget Management Act (FRBM Act, 2003) in the Supreme Court. The amendments imposed a net borrowing ceiling, leading Kerala to argue it infringes upon the “legislative domain of the State.”
  • Kerala contends that “Public debt of the State” is an item in the State List under Article 246 of the Constitution. It asserts that the amendments encroach upon the state’s legislative powers.

About FRBM Act, 2003

  • Enacted to ensure intergenerational equity in fiscal management and long-term macroeconomic stability.
  • Imposes limits on Central Government borrowings, debt, and deficits.
  • The 2018 amendment sets a combined debt-to-GDP ratio target of 60% by 2024-25 (40% for the Centre and 20% for states).
  • States have their own FRBM Acts, modelled after the central government’s FRBM Act which reflects the states’ commitment to fiscal responsibility and macroeconomic stability.
Other Fiscal Federalism Tools

·       Finance Commission (Article 280): Facilitates the transfer of funds between the Centre and states.

·       Intergovernmental Transfers: Central government provides various grants and loans to states and local bodies.

·       Article 293(2): Empowers the Central Government to make loans to any state and provide guarantees for state loans.

·       Article 293(3): Restricts states from borrowing without the consent of the Central Government if they have outstanding loans or guarantees from the Central Government.

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