11 November 2024 : The Hindu Editorial Analysis

1. States and the Centre’s fetter of ‘net borrowing ceiling’

(Source – The Hindu, International Edition – Page No. – 8)

Topic: GS2 – Indian Polity – Federal Structure

Context

In 2023, the central government imposed a borrowing cap on Kerala, restricting its financial autonomy and sparking a constitutional debate on Article 293. Article 293 governs state borrowing powers. Kerala challenged this cap, arguing it limits the state’s fiscal independence. The Supreme Court has referred the issue to a Constitutional Bench.

Overview of the Net Borrowing Ceiling on Kerala

• In 2023, the central government imposed a Net Borrowing Ceiling (NBC) on Kerala, capping the state’s borrowing at 3% of its projected Gross State Domestic Product (GSDP) for FY2023-24.
• This NBC includes all forms of borrowing, such as open market loans, loans from financial institutions, and public account liabilities, extending to certain borrowings by state-owned enterprises to prevent circumvention of the limit.
• The ceiling has constrained Kerala’s financial capacity, restricting developmental and welfare investments, and has led to political and legal controversies over state fiscal autonomy.

Kerala’s Legal Challenge and Article 293 Interpretation

• Kerala challenged the NBC in the Supreme Court, claiming that it infringes upon the state’s executive power under Article 293, which allows states to borrow on the security of their Consolidated Fund.
• Article 293 empowers states to borrow domestically, and the state argued that the Centre’s restrictions on this ability infringes on their constitutionally guaranteed fiscal autonomy.
• This is the first case where Article 293 is being interpreted by the Court, raising significant questions about state financial independence.

Borrowing Powers under the Constitution

• Chapter II of Part XII of the Indian Constitution outlines the borrowing powers of the Centre and states.
  • Article 292: Empowers the Centre to borrow on the security of the Consolidated Fund of India.
  • Article 293: Grants states the authority to borrow within India on their Consolidated Fund’s security.
• Article 293(3): If a state has outstanding loans from the Centre, it requires the Centre’s consent for new borrowing, and the Centre can attach conditions to this consent.
• This provision was inspired by Section 163 of the Government of India Act, 1935, but lacks the clause preventing arbitrary delays or conditions that existed in the original Act.

Fiscal Responsibility and Budget Management Act, 2003

• The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was implemented to manage financial discipline, aiming for the elimination of revenue and fiscal deficits.
  • The Act set a target for the Centre to maintain its fiscal deficit at 3% of GDP.
  • The FRBM Amendment Act, 2018 established that the Centre’s fiscal deficit must not exceed 3% of GDP, and total public debt should stay below 60% of GDP by FY2025-26.
• The Centre’s enforcement of borrowing limits on states for fiscal consolidation has restricted states’ budgetary independence.

Supreme Court Case and Fiscal Autonomy Concerns

• Kerala’s Supreme Court case questions if Centre-imposed fiscal regulations conflict with states’ fiscal rights under Article 293.
• The Court has referred the issue to a Constitutional Bench, considering broader implications for fiscal decentralisation and autonomy.
• The case also examines the impact of these regulations on the Reserve Bank of India’s role in fiscal consolidation.

Suggestions for Strengthening Article 293

• Establishment of a Borrowing Commission: A commission, similar to the Finance Commission, could be established to resolve borrowing disputes, balancing both state and Centre interests.
• Guidelines for Centre’s Power under Article 293(4):
  • Transparency in decision-making – making the criteria for borrowing approvals and rejections clear.
  • Consultation with states before imposing any borrowing terms or conditions.
  • Uniform application of terms to prevent discrimination and ensure fairness.
  • Preservation of state fiscal autonomy by implementing only reasonable restrictions on borrowing.
• Following these guidelines could promote cooperative federalism and balanced fiscal management between the Centre and states, ensuring that Centre’s Article 293(4) powers are applied in a fair and transparent manner.

PYQ: What are the reasons for introduction of Fiscal responsibility and Budget Management (FRBM) act, 2003? Discuss critically its salient features and their effectiveness. (200 words/10m) (UPSC CSE (M) GS-3 2013)

Practice Question:  Discuss the implications of Article 293 on the financial autonomy of Indian states. In light of the Kerala borrowing cap case, examine how federal fiscal policies impact cooperative federalism. (250 Words /15 marks)

2. Can India get rich before growing old?

(Source – The Hindu, International Edition – Page No. – 9)

Topic: GS3 – Indian Economy.

Context

India’s demographic dividend, once seen as a potential driver of economic growth, is now under threat due to declining fertility rates and underutilised workforce potential. Most states have fallen below replacement-level fertility, raising concerns about a shrinking working-age population. Without addressing constraints on manufacturing, India risks a middle-income trap.

India’s Demographic Dividend: An Unrealised Potential

• India’s demographic dividend refers to the potential economic growth stemming from a large, working-age population.
• Despite high expectations since liberalisation, the demographic dividend has not guaranteed perpetual growth.
• India’s population bulge in the working-age group has led to competition for education, jobs, and housing, sometimes prompting political responses, like job reservations for locals.

Declining Fertility Rates and Demographic Shift

• India’s Total Fertility Rate (TFR) has dropped faster than expected, currently at 1.99, down from 2.6 in 2010.
• Most states are now below the replacement-level fertility rate of 2.1, with southern states showing especially low rates.
• By 2030, the working-age population will start to decline, posing a challenge for sustained economic growth and marking the end of the demographic dividend.

Economic Challenges: Middle-Income Trap and Low-Productivity Jobs

• India’s low per capita income and declining TFR create the risk of a “middle-income trap,” where economic growth stagnates before reaching high-income status.
• India’s labour force participation rate (LFPR) in urban areas is only 50%, and a large portion of the workforce is still employed in low-productivity agriculture.
• Compared to China, which reduced its agricultural workforce share by 32% after liberalisation, India has only reduced it by 17%.

Focus on Manufacturing for Economic Growth

• For India to harness its demographic dividend, a shift from low-productivity sectors (agriculture) to manufacturing is essential.
• The manufacturing sector has not kept pace with the services sector, yet it has significant job-creation potential, especially for women.
• For instance, the textile industry, valued at $150 billion, employs 45 million people, whereas the IT sector, worth $250 billion, employs only 5.5 million.

Obstacles to Manufacturing Growth

• India’s manufacturing faces numerous challenges, including complex business licensing, high tariffs, limited land access, and rigid customs regulations.
• Comparatively, fewer manufacturers in Vietnam report these issues, indicating a more conducive business environment there.
• Bureaucratic constraints prevent manufacturers from optimising land use and increase costs due to stringent regulations on building standards and worker housing.

Policy Recommendations to Capitalise on the Demographic Dividend

• The government should lower tariffs to reduce manufacturing costs, finalise free trade agreements (e.g., with the U.K. and EU), and improve labour laws.
• State governments should reform regulations to allow more flexible work arrangements and address issues related to land use in industrial zones.
• Inspired by China’s success, India should transition its workforce into manufacturing to fully leverage its demographic dividend before it declines.

PYQ: “Demographic Dividend in India will remain only theoretical unless our manpower becomes more educated, aware, skilled and creative.” What measures have been taken by the government to enhance the capacity of our population to be more productive and employable? (200 words/12.5m) (UPSC CSE (M) GS-2 2016)

Practice Question:  Discuss the implications of India’s declining fertility rate on its demographic dividend and the potential for economic growth. What steps should be taken to prevent a middle-income trap and effectively harness the workforce for high-productivity sectors? (250 Words /15 marks)