Govt’s debt is our debt

Industrialist J Paul Getty famously said, “If you owe the bank $100, it’s your problem; if you owe the bank $100 million, it’s the bank’s problem.” But whose problem is it when a government owes the bank billions of dollars?

Governments around the world borrow money; this is not a new or recent development. Wealthy bankers like the Jagat Seth family bankrolled the Mughals, the Nawabs of Bengal, and their British successors. Fans of fantasy will be familiar with the Iron Bank of Braavos and its role in the politics of Westeros. However, in the modern world, when a government is unable to pay its debt, though no dragons or invasions may be involved, it does come with severe economic consequences, as Sri Lanka is finding out.

So, it is no surprise that the Constitution (Article 292) limits the Union government’s power to borrow by allowing Parliament to impose limits on such borrowing by law. But the Union government is not the only one permitted to borrow; state governments are permitted to do so as well in accordance with Article 293.

While the Union government can raise money through debt subject only to limits laid down by law, state governments are restricted by how they can borrow under Article 293. While the Union government can borrow money from anywhere, states can only borrow money from within India. Moreover, when a state borrows money from the Union government, conditions can be imposed by the latter, and if the state has outstanding debts to the Union, it cannot borrow further without the Union government’s permission.

Articles 292 and 293 are also a departure to some extent from the Government of India Act, 1935, which empowered provinces to raise debt from anywhere, subject to the limits laid down by the provincial legislature. Further, while the consent of the central government was needed to borrow from outside India, such consent was required to not be “unreasonably withheld” or denied if good cause was shown. This particular provision has been removed in the Constitution while the requirement of consent remains.

This express departure was noted in the Constituent Assembly but defended by K Ananthasayanam Ayyangar on the ground that such a provision relating to withholding of consent would not be needed since it would anyway be the national government which would be giving loans and it would be unlikely to deny permission to raise loans. No express reason was given as to why states should not be allowed to borrow from abroad. Prof K T Shah, on the other hand, wanted even more limits on the power of the executive to borrow, fearing (and maybe foreseeing) some of the problems that could occur due to rampant borrowing from international markets.

The power of the Union to impose conditions on the states has become a point of contention recently. During the Covid pandemic, as states’ revenues dipped sharply while expenses shot up, the Union government allowed states to borrow up to 5% of the Gross State Domestic Product (up from the regular limit of 3.5%) provided that they committed to adopting the ‘one nation, one ration card’ scheme, undertake reforms in the power sector, etc.

This was a problematic move, and as commentators have pointed out elsewhere, an attempt to tilt the careful federal balance to centralise more power. It was essentially, they argued, the Union government dictating policies to state governments using its power to regulate their borrowing. States, especially Kerala, have pushed back against the Union’s interpretation of Article 293 on its powers to limit state governments’ ability to raise debt.

Balancing federal concerns and economic stability in the context of public debt is never easy and always up for debate. While this debate may be best left to economists and financial experts, as the experience of Sri Lanka and other countries shows, it is something that affects the finances of each and every one of us. So, to the question I began this column with -- whose problem is it when the government itself owes the bank billions? -- the answer is, “all of us”.