OFF BUDGET BORROWINGS

4. How Indian States Borrow Money

Indian states, like any other government entity, require funds for various purposes like infrastructure development, social welfare programs, and administrative costs. To bridge the gap between their income and expenditure, they resort to borrowing money. 

• Market borrowings are the most common way for states to raise funds. They issue State Development Loans (SDLs), which are essentially bonds that investors can purchase. The bonds have different maturities, ranging from a few months to several years. Investors are attracted to SDLs because they offer a relatively safe and secure way to invest, backed by the state government's guarantee. The interest rate on SDLs varies depending on the creditworthiness of the state and the maturity of the bond. States with strong finances and good track records can borrow at lower interest rates than those with weaker finances.
• Ways and Means Advances (WMA) are short-term loans that states take from the Reserve Bank of India (RBI) to meet temporary cash flow mismatches.WMAs are typically repaid within a few months, and the interest rate is lower than what states pay on SDLs. However, states are discouraged from relying heavily on WMAs, as excessive use can lead to fiscal indiscipline.
• In some cases, the central government may provide loans to states to meet specific needs, such as funding for natural disasters or infrastructure projects. These loans are typically provided at concessional interest rates compared to market borrowings. 
• Some states also raise funds through other means, such as issuing tax-free bonds or selling off assets. However, these are relatively less common methods compared to market borrowings and WMAs.
• States can also leverage Public-private partnerships (PPPs) to attract private investment in infrastructure projects, which can reduce their reliance on debt financing.
   

• The difference between a state's income and expenditure is called the fiscal deficit. A higher fiscal deficit means the state needs to borrow more money.
• A state's credit rating reflects its financial health and ability to repay debt. A higher credit rating allows the state to borrow at lower interest rates.
• The overall interest rates in the market also affect the cost of borrowing for states. When interest rates are high, it becomes more expensive for states to borrow.

• Some Indian states have accumulated high levels of debt, which can be a burden on their finances and make it difficult to borrow more in the future.
• If states borrow excessively without taking steps to improve their finances, it can lead to fiscal instability.
• Some states are heavily reliant on loans from the central government, which can limit their autonomy and flexibility in managing their finances.

5. What is the net borrowing ceiling for states?

The net borrowing ceiling for states in India is 3.5% of their Gross State Domestic Product (GSDP), as per the recommendations of the Fifteenth Finance Commission. This means that states cannot borrow more than 3.5% of the value of all goods and services produced within their borders in a given year.

However, there are some additional borrowing avenues available to states under specific conditions:

• States can borrow an additional 0.5% of their GSDP if they undertake and achieve specific reforms in the power sector.
• States can borrow an amount equivalent to their contributions to the National Pension System (NPS) for government employees.
• In exceptional circumstances, the central government may provide special assistance to states in the form of additional borrowing space.

6. What is Article 131 of the constitution is all about?

Article 131 of the Indian Constitution deals with the original jurisdiction of the Supreme Court, meaning the cases it can hear directly without going through lower courts. This article establishes the Supreme Court as the ultimate arbiter of disputes between different units of the Indian federation.

Scope of Disputes

• Between the Government of India and one or more States includes disputes about the interpretation of the Constitution, sharing of resources, or any other issue arising from the relationship between the central government and state governments.
• Between two or more States covers disputes between states regarding their boundaries, water sharing, or other inter-state issues.
• Disputes involving the Union of India and any State or States on one side and one or more other States encompass situations where a state or group of states disagrees with the central government and another state or group of states on a particular issue.

Exceptions

• Disputes arising from pre-Constitution treaties or agreements are not covered under Article 131 unless the treaty specifically allows it.
• If another agreement between states or the Centre and states excludes Supreme Court jurisdiction for a specific type of dispute, Article 131 won't apply.

Significance of Article 131

• By providing a final platform for resolving disputes between the Centre and states, Article 131 helps maintain a balance of power and prevents conflicts from escalating.
• States can directly approach the Supreme Court to defend their interests and rights against the Centre's actions.
• The Supreme Court's rulings on inter-state disputes set precedents and ensure consistent interpretation of the Constitution across the country.