Article 293: Borrowing Power of the States

Imagine a State that has run short of money. It wants to borrow more. But it already owes the Union Government a large loan. Can it just go to the market? Article 293 says no. A State may borrow freely within India. But if it still owes the Union, it needs the Union’s consent. Kerala took this very clause to the Supreme Court, and the case is still alive.

1Chapter 1: What the Four Clauses Say

Must Know

Clause (1): the State borrows on its own Fund

• Article 293(1) gives a State’s executive the power to borrow within India.
• The loan is secured on the Consolidated Fund of the State.
• The State can also give guarantees, within limits.
• Who fixes those limits? The State Legislature, by law, if it chooses to.
• So the first limit on a State’s borrowing is its own Legislature, not the Union.
• Note the words “within the territory of India”. A State cannot borrow abroad under this article.

Clause (2): the Union lends and guarantees

• The Union may make loans to any State.
• It may also guarantee loans a State has raised.
• It does so on conditions laid down by Parliament’s law.
• For guarantees, there is one more check. The limits fixed under Article 292 must not be crossed.
• Money for these loans is charged on the Consolidated Fund of India.
• So it is paid as a priority, without a fresh vote.

Clauses (3) and (4): the consent key

• Clause (3) is the one every exam asks about.
• A State may not raise any loan without the Union’s consent while a Union loan or guarantee is still outstanding.
• The same bar applies to loans from the “predecessor Government”, meaning the pre-1950 Government of India.
• Clause (4) lets the Union attach conditions when it consents.
• So consent is not a blank cheque. The Centre can shape how much the State borrows and on what terms.

2Chapter 2: Why the Union Holds the Key

Must Know

A story of shared risk

• Think of a parent who has already lent money to a child, or signed as guarantor for the child’s loan.
• Before the child borrows more, the parent wants a say.
• That is clause (3) in plain words.
• When the Union lends to a State or guarantees its loans, it shares the risk.
• If the State defaults, the Union’s own credit is hurt.
• So the Constitution gives the Union a say before the State piles on more debt.

Nearly every State is covered

• Most States carry some Union loan or guarantee.
• So clause (3) reaches almost every State’s fresh borrowing.
• A debt-free State would not need consent. In practice that is rare.
• This is why Article 293(3) has become the Centre’s strongest lever over State finances.

The yearly ceiling

• Each year the Union sets a Net Borrowing Ceiling (NBC) for every State.
• It is a share of the State’s projected GSDP.
• The NBC counts all sources: open-market borrowing, loans from institutions and public-account liabilities.
• The ceiling turns clause (3) into hard numbers every year.

3Chapter 3: Kerala Goes to Court

Good to Know

The 27 March 2023 letter

• On 27 March 2023, the Union fixed Kerala’s NBC for 2023-24 at 3% of its projected GSDP.
• That came to about ₹32,442 crore.
• Kerala said the Union had cut its open-market borrowing room.
• It also said the Union was misusing Article 293(3).

The suit under Article 131

• Kerala filed State of Kerala v. Union of India, Original Suit No. 1 of 2024.
• It used Article 131, which gives the Supreme Court original jurisdiction over disputes between the Union and a State.
• Read more in Article 131 of the Constitution.

March and April 2024

• On 12 March 2024, the Supreme Court urged the Union to allow Kerala more borrowing before 31 March, as a one-time measure.
• On 1 April 2024, the Court refused interim relief.
• It referred the case to a five-judge Constitution Bench.
• The Court noted that Article 293 had never been fully interpreted.

The questions sent to the Bench

• Does Article 293 give States an enforceable right to borrow?
• Do borrowings by State-owned enterprises count under clause (3)?
• Do public-account liabilities count too?
• The answers will shape the real reach of the consent clause for every State.

4Chapter 4: The Two Sides of the Argument

Good to Know

What the Union says

• The NBC is essential for macro-economic stability.
• It keeps the country’s total debt sustainable.
• Because the Union stands behind State debt, it must keep a check.

What Kerala says

• The cap is arbitrary.
• It cuts into the State’s constitutional fiscal autonomy.
• It punishes fiscally responsible States along with careless ones.

Why it matters to every State

• Borrowing pays for welfare and development.
• So the cap directly decides how much a State can spend on its people.
• That is why this suit is called a landmark test of Article 293.

5Chapter 5: Articles 292 and 293 Side by Side

Great to Know

Same Part, different rules

• The Union answers only to Parliament.
• An indebted State also answers to the Union.
• In one line: 292 is self-governing Union borrowing. 293 is Union-supervised State borrowing.
• Read the first half in Article 292: Borrowing Power of the Union.

The Fund link

• Article 266 creates the Consolidated Fund of each State.
• That is the fund Article 293(1) lets the State use as security.
• Union loans to a State are charged on the Consolidated Fund of India.
• Because of this, they are paid automatically, without a fresh parliamentary vote.
• See Article 265 of the Constitution for the tax side of the same Part.

Why the framework exists

• Without clause (3), a State could keep adding debt while the Union quietly backs its old debt.
• Unchecked borrowing could shake both the State and the Union’s credit.
• So the consent gate acts as a safety valve.
• Read the wider picture in Centre-State Relations and the Federal Structure.

6In the News: The Case Is Still Pending

Current Affairs

A live constitutional question

• State of Kerala v. Union of India is still pending before the Constitution Bench.
• Its outcome will decide how far the Centre can cap State borrowing under Article 293(3).
• Any news on State borrowing limits is Article 293 in action.
• Expect this to stay a favourite for Polity and Current Affairs questions.

7Previous Year Questions

Exam angle: two real questions, and the traps around them.

Quick Q&A

• Who sets a State’s own limit? State Legislature.
• When is consent needed? If Union debt is outstanding.
• Kerala’s 2023-24 NBC? 3% of GSDP.
• Which article did Kerala use? Article 131.
• Bench size? Five judges.