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Difficulty: Very hardFiscal Policy, Union/State Budgeting, Public Finance, and Taxation Structure

Consider the following statements regarding the borrowing powers of State Governments and the regulation of public debt under the Indian Constitutional framework and fiscal policy rules:

1. A State Government possesses the constitutional executive power to raise external loans directly from international financial institutions, provided the borrowing is authorized by a resolution of the State Legislature.
2. Under Article 293(3) of the Constitution of India, a State cannot raise any market loan without the consent of the Union Government if there is still outstanding any part of a loan extended to the State by the Union or guaranteed by the Union.
3. Under the updated Fiscal Responsibility and Budget Management (FRBM) framework, off-budget borrowings undertaken by State-owned entities, where principal and interest debt servicing is funded from the State budget, are included within the State's Net Borrowing Ceiling.

Which of the statements given above are correct?

  1. A
    1 and 2 only
  2. 2 and 3 onlyAnswer
  3. C
    1 and 3 only
  4. D
    1, 2 and 3

Answer

Statements 2 and 3 only are correct.
The correct response identifies that Statements 2 and 3 are true while Statement 1 is false. Under Article 293(1), a State Government's executive power to borrow is restricted strictly to within the territory of India upon the security of the Consolidated Fund of the State. Foreign borrowings fall under Entry 37 of the Union List. Statement 2 correctly expresses Article 293(3), which mandates Union consent for any new loan if a State has outstanding Union loans or guarantees. Statement 3 accurately captures recent fiscal governance norms where off-budget borrowings of State SPVs serviced via budget allocations are brought under the Net Borrowing Ceiling.

Step-by-Step Solution

1
Analyze Statement 1 regarding constitutional borrowing powers of State Governments.
Statement 1 is incorrect.
Under Article 293(1) of the Constitution of India, the executive power of a State extends only to borrowing within the territory of India. Foreign loans and foreign exchange borrowings fall strictly under Union List (Entry 37 of List I) and cannot be undertaken directly by States.
2
Analyze Statement 2 regarding Union consent under Article 293(3).
Statement 2 is correct.
Article 293(3) explicitly mandates that a State may not, without the consent of the Government of India, raise any loan if there is still outstanding any part of a loan made to the State by the Government of India or in respect of which a guarantee has been given by the Union.
3
Analyze Statement 3 regarding off-budget borrowings (OBBs) under the FRBM framework.
Statement 3 is correct.
To ensure fiscal transparency and prevent evasion of fiscal deficit targets, the Ministry of Finance updated FRBM guidelines to count Off-Budget Borrowings (OBBs)—borrowings by State PSUs/SPVs serviced from the State budget—as part of the State's Net Borrowing Ceiling (NBC).

Key Concept

Constitutional provisions governing public debt (Article 293) and Net Borrowing Ceiling under FRBM framework.
Estimated Time:2m 0s
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Topics

Fiscal Policy, Union/State Budgeting, Public Finance, and Taxation Structure