State borrowing limits
Also called: Net borrowing ceiling, Article 293 · Topic: Fiscal Federalism: Finance Commission, Devolution and Centre-State Finances · NCERT: Beyond NCERT
Meaning
State borrowing limits are annual caps the Centre sets on how much each state may borrow, usually as a share of GSDP. The rules come from Art. 293:
- A state may borrow only within India.
- It needs the Union's consent while any loan from the Union is still outstanding, and every state has such loans.
- The Union may attach conditions to that consent.
The yearly cap is called the Net Borrowing Ceiling (NBC).
Example
The 15th Finance Commission set the states' fiscal deficit path at 4% of GSDP in 2021-22, 3.5% in 2022-23 and 3% in 2023-26. It allowed 0.5% extra for power-sector reforms. Since 2022-23, off-budget borrowing by state companies and SPVs (special purpose vehicles) counts within the NBC when it is repaid from the state budget. Kerala challenged these curbs under Art. 131, and in April 2024 the Supreme Court referred the case to a Constitution Bench. The 16th Finance Commission (2026-31) keeps the limit at 3% of GSDP.
Don't confuse with
- Fiscal responsibility laws: these are states' own laws setting deficit targets. Borrowing limits are caps imposed by the Centre under Art. 293.