Borrowing for today, burdening tomorrow

The finance audit report for Karnataka, prepared by the Comptroller and Auditor General of India and presented in the Karnataka Assembly, indicates that to address the shortfall, the state government has increased its borrowings. As a result, Karnataka’s net market loans have reached Rs 63,000 crore in 2023-24, a rise of Rs 37,000 crore from the previous year, with around 15% earmarked for guarantees. The CAG’s findings regarding this additional borrowing show that routine spending and welfare schemes are increasingly being funded through debt. The state is therefore relying on loans to meet regular expenses rather than to promote future growth.

While welfare programmes are essential in tackling inequality and poverty, sound financial management is equally critical. If Karnataka fails
to strike a balance between welfare and growth, its debt burden will continue to rise. The state must make prudent decisions: welfare is important, but it should not come at the expense of long-term development. 

When expenditure consistently exceeds revenue, governments risk entering a cycle of borrowing that creates heavy repayment obligations in the future. If a government borrows excessively for non-developmental purposes for short-term political gain over long-term needs, its successor inherits the burden. This reduces fiscal space for developmental initiatives, forcing a significant portion of the budget towards servicing debt and interest. As a result, essential sectors such as healthcare, education, and infrastructure are left unfunded. Moreover, with fewer resources available, the new government’s capacity to launch new developmental projects or create jobs is severely constrained. In effect, the legacy of debt not only restricts economic growth but also limits improvements in living standards for citizens.

India’s Constitution, under Article 293, vests the Union government with legislative authority over state borrowing. Where states already carry outstanding central loans, they must obtain the Centre’s consent to raise further loans. The Fiscal Responsibility and Budget Management Act (FRBMA), 2003, sets legally binding targets for fiscal deficit (the gap between government revenue and expenditure) and debt levels, aiming to ensure fiscal sustainability over the medium term. The current legal framework --including India’s Constitution Article 293 and the FRBMA – has drawn criticism for failing to define “public debt” clearly, for not specifying borrowing objectives, and for not mandating comprehensive debt management strategies, especially at the state level. Neither provision addresses the question of borrowing for “freebies” or other non-developmental activities.

The Centre’s ability to regulate state borrowing is, therefore, a crucial mechanism. By placing limits or conditions on loans, it can direct state finances towards developmental projects and discourage excessive borrowing for non-development activities. Kerala has challenged the Centre’s borrowing restrictions in the Supreme Court, arguing that they violate the principle of fiscal federalism. The case has been referred to a Constitution Bench for a definitive interpretation of Article 293.

There is no distinct law against borrowing for “freebies”; the legal debate has centred on whether such schemes serve a “public purpose”. The Supreme Court has raised concerns over “irrational freebies” promised during elections, warning that they risk distorting the economy, draining public funds, and undermining fair electoral competition. A significant issue is the absence of a legal distinction between “freebies” and genuine welfare programmes. The Court has suggested that it is up to the legislature to tackle this issue.

Without specific laws governing state borrowing for non-development purposes, there is a risk of fiscal imbalance, reduced transparency, mounting debt, and potential economic instability -- burdens that could hinder development and get passed on to future generations. A balanced approach is therefore vital to sustain both social welfare and financial stability.

What is needed is specific legislation regulating state borrowing, particularly for non-development purposes. Such a framework should clearly distinguish between productive, growth-supporting borrowing and non-productive borrowing, while requiring transparent reporting to the legislature. This would enhance fiscal responsibility and accountability, ensure efficient use of public funds, boost investor confidence, and prevent states from using debt to fund consumption or revenue-neutral activities that do not generate long-term economic growth.

(The writer is a retired deputy director of boilers)