The federal structure of India has been brought into the reckoning yet again owing to the latest developments, ranging from the Centre pulling the trigger to effect relevant provisions of the Disaster Management Act, 2005, to the GST Compensation gridlock. With only so much wherewithal to finance their needs, the states resorted to borrowing from the Centre, and hence, Article 293 came into the picture. Owing to it being a relatively less-dealt-upon Article by the Supreme Court, this blog tries to rifle through its provisions and bring out the components of essence to light. Further, it aims to draw out the Article’s position on economic maintenance and constitutional principles.
About Article 293
Article 293 of the Constitution of India (Draft Article 269) covers vital aspects regarding state government borrowings. Comprising of four clauses, the later ones require the states to obtain the prior consent of the Centre for undertaking fresh loans if they are indebted to the Centre. However, these loans are subject to certain conditions. Despite its provisions to maintain the fiscal stability of the country as a whole, it has come under considerable scrutiny. Recent trends of encroachment in the states’ domain and centralization of power have put several minds into recalculating this Article’s efficacy.
As new as its provisions sound, the Article is a substantive reproduction of sub-section (1), (2), and (3) of Section 163 of the Government of India Act, 1935 (hereinafter GoI Act 1935). However, the only shade of difference can be found in the area of borrowings from outside India, regarding which the GoI Act permitted the states to do the same only after obtaining consent from the Federation, while Article 293 proscribes states from borrowing from outside India. As a matter of fact, the drafters of the Indian Constitution were more comfortable with ascribing greater control to the Central Government over states’ sub-national borrowings, the reason being seven out of nine provinces were plagued with outstanding loans. Dr. B.R. Ambedkar had mentioned that “borrowing” is an executive action that does not stand as an unfettered power as it is subject to the law.
The Indian economy has always been a part of our daily conversations, and more so during the momentary waves of the pandemic. Macroeconomic sustenance and overall fiscal deficit require each state to maintain healthful fiscal balances which is precisely what Article 293 aims to achieve. Seized by the fact that borrowing is an imperative, debt sustainability and prudential undertaking of loans must not be overlooked, as state indebtedness affects the fiscal health of the nation as a whole (general government debt). Even if areas of revenue stream are devolved to the state governments, considerable reliance on intergovernmental debt would be there, except for the richer states.
History has it that loosening of the Central Government’s grip has enabled states to pursue creative financing mechanisms and wrong adjustment choices to evade harsh budget constraints. As a result, the gross fiscal deficit to GDP ratio of all state governments shored up to a high of 4.2% in 1998-99, the highest in Indian fiscal history so far. For example, the case of Canada furthers the argument made above as in their case, complete autonomy was granted regarding provincial borrowings, which segued into excessive indebtedness. Article 293 of the Constitution of India comes in handy for the Centre for the sole reason that, under Articles 256 & 257(1) of the Constitution of India, the wording “shall endeavour” reflects them to be non-binding when it comes down to the Centre directing the states to ensure compliance with Central Laws. For example, the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act, 2003) requires the general government debt to not exceed 60% of GDP (40% Central govt., 20% State govt.). Based on the reasoning above, the Central Government would have to put additional energy into affecting compliance by the states. Hence, Article 293 is made use of when it comes to macroeconomic stability.
Deterrent to Cooperative Federalism
Despite countering all the realities of India’s macroeconomic system, Article 293 has moved the spotlight towards itself from the start of the 2020s. With recent instances of the Centre encroaching upon the domain of the states, an eerie feeling of over-centralization has set in. Dr. Y. V. Reddy, former Governor of RBI and Chairman of the 14th Finance Commission of India along with Dr. G. R. Reddy, Advisor (Finance) to the Government of Telangana, in their book “Indian Fiscal Federalism”, have highlighted, “Over the years there has been an enlargement of the Concurrent List and the Centre’s spending on State Subjects presumably on the grounds that such expenditure will serve national priorities better” (Para 2, Page 76). A purposive interpretation of clause (3) of the said Article signifies that the state is only bound to apply for the Centre’s consent if it is indebted to the Centre, or if it has undertaken such a loan whose guarantee of repayment has been given by the Centre and the said amount is outstanding till the date of application.
The pandemic has scratched open the deficiencies in our cooperative-federalism model. A case in point can be, conditions concomitant with the state borrowings from the Centre, backed by clause (4) of the said article. During the pandemic in 2020, the government had raised the maximum limit of borrowing to 5% of Gross State Domestic Product (GSDP), however, such loans were linked to central schemes such as the ‘One Nation One Ration’ Card, reforms in Ease of Doing Business to attract foreign investors & et al. Clause (4) allows the Centre to impose restrictions so as to protect the Centre as a creditor; however, it limits the governments array of conditions to those which help in fiscal stabilization. On the contrary, Article 266 of the Constitution of India empowers the states to treat borrowings from the Centre as a part of their State Consolidated Fund and utilize it according to their own needs. The Supreme Court of India has acknowledged the concept of cooperative federalism in Jindal Stainless Ltd.& Anr vs State of Haryana & Ors. Moreover, in State of Rajasthan & Ors. Etc vs Union of India Etc., the Judges underlined the observation of Granville Austin wherein he held that “the Constitution of India was perhaps the first constituent body to embrace from the start what A.H. Birch and others have called “cooperative federalism”. Lastly, the Kerala High Court in Mathew v Union of India held that “Article 293 is an enabling provision authorising state borrowing as well as laws regulating the same, but such limits on borrowing are not embodied in the Article itself. Clearly, by virtue of this constitutional provision, the states are empowered to pass their FRLs”.
Bearing the previous instances in mind, the “consent” clause ((3)) limited the ability of the state in raising funds from the market. Since 2/3rd of the Centres expenditure is channelled to finance non-developmental activities like interest payments, defence et al., the amount left for transfer was meagre for the states considering the migrant crisis and labour shortages.
Unlike in the case of state governments, no oversight authority exists to keep an eye on the Centre’s borrowings. A fiscal council like the Australian one must be established as an independent watchdog and controller of borrowings in the country. The same was stressed by Shri N.K. Singh, Chairman, XV Finance Commission at the launch of the book ‘Indian Fiscal Federalism’. The recent inclusion of Rs. 1 lakh crore corpus for state borrowing in the Union Budget 2022-23 hasn’t gone down well with the states due to pre-existing fault lines in the Centre-State relations. According to the XV Finance Commission, states’ liabilities towards the Centre have been declining. Therefore, the court of public opinion deems it to be a way for the Centre to maintain its sway over the states’ finances. Even if it’s true, the Centre must incorporate a more inclusive and cooperative approach. Another alternative that can be taken is aiding states through grants under Article 282 of the Constitution of India; as such, they are not to be returned. On the heels of the GST Council, a cooperative forum should be constructed to hear grievances state-wise and formulate decisions binding on all the states.
Undertones of state dissonance with growing over-centralisation will soon turn into a clarion call for disregarding central authority if cooperative and consultative methods aren’t adopted by both parties. Existing fissures of mistrust must not erode public confidence in their respective governments, today when everyone is trying to scramble back to the status quo ante. More importantly, despite all the differences and discontentment, the federal structure of the country must not become collateral damage under no circumstances. Article 293 must perform its balancing act between macroeconomic stabilization and constitutional principles.
* Shubhankar Sharan is a first-year student at Gujarat National Law University, Gandhinagar.
The views expressed above are the author's personal views.