SC to set up five-judge Constitution bench to discuss ceiling on borrowing by States

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The SC will examine if the states have an enforceable right to raise its borrowing limit over the cap fixed by the Centre.

It will also examine if such restrictions are in conflict with the role of RBI as public debt manager.
The reference to a Constitution Bench was made earlier this year on the basis of an original suit filed by Kerala government.

Impact of NBC on States

Violation of Principles of Federalism : Fiscal decentralization is an important aspect of federalism.
- Fiscal Decentralization refers to devolving financial powers to regional and local governments to achieve good governance.
Impacting spending on Developmental expenditure by States: Mainly constituting social- economic services that have witnessed an increase over the years (RBI).
Limited sources of Revenue: Power to levy taxes largely rests with the Union. Further, the proceeds from Cess and Surcharge are not shared with the states.

Constitution (Article 293): Extends power to states to borrow within India (not abroad) upon the security of the Consolidated Fund of the State.
- Centre may extend loans to the State or give guarantee on the loans raised by it.
- However, States cannot raise any loan without the consent of the Centre in case of an outstanding debt.
Net Borrowing Ceiling (NBC) for States is fixed at 3% of Gross State Domestic Product (GSDP) for FY 2023-24 based on the 15th Finance Commission recommendations.