Centre warns against unchecked state borrowing amid Kerala's disputetext_fields
New Delhi: The Centre has highlighted the potential adverse impact of uncontrolled borrowing by states on the overall credit rating of the country, particularly addressing the fiscal challenges faced by Kerala.
Attorney General R Venkataramani, in a note submitted to the Supreme Court, highlighted that public finance management is a national concern, and unchecked state borrowing could disrupt the fiscal stability of India.
Venkataramani asserted that if a state engages in reckless borrowing to fund unproductive expenses or poorly targeted subsidies, it would crowd out private borrowing from the market. The note outlined that states' debt significantly influences the credit rating of the entire country. Default by any state in debt servicing could lead to reputational issues, creating a domino effect jeopardising India's financial stability.
The Attorney General expressed concern that uncontrolled borrowing would elevate borrowing costs for private industries, negatively impacting the production and supply of goods and services in the market. It could result in reduced funds for development, leading to societal challenges and loss of income at both the state and national levels.
Venkataramani clarified that states require permission from the Union government to borrow from any source, and the Union government, guided by the recommendations of the Finance Commission, sets borrowing limits for states. These limits are established transparently, aiming for non-discrimination among states.
The note comes in response to a suit filed by the Kerala government, accusing the Centre of interfering in the state's fiscal autonomy by imposing a ceiling on net borrowing. The suit argues that the Centre's actions violate the federal structure of the Constitution and encroach upon the state's exclusive powers to regulate its finances.