Financial emergency

Also called: Article 360 · Topic: Emergency Provisions and President's Rule · NCERT: Class 9, Ch 6 "Democracy"; Class 11, Ch 7 "Federalism"

Meaning

A financial emergency is an emergency that the President can declare under Article 360 when satisfied that the financial stability or credit of India, or of any part of its territory, is threatened [2]. It is the only emergency that lets the Union cut the salaries of Supreme Court and High Court judges and take control of state budgets. Article 360 has never been used.

Explanation

Grounds: when it can be declared

• It is the third emergency in Part XVIII of the Constitution. The other two are the national emergency (Art. 352) and President's rule (Art. 356). President's rule is when the Union government takes over the running of a state for a time.
• Ground: the President must be satisfied that the financial stability or credit of India, or of any part of it, is threatened [2].
• Financial stability means the government's money system is in good order. It can pay its bills, its currency keeps its value and it can manage its budget.

• Credit means lenders trust the government enough to lend to it, and the government can repay its loans.

• The threat can be to all of India or only one part. A crisis in a single state's finances is enough.

• The President acts on the advice of the Union Council of Ministers. In practice, the "satisfaction" is the Union Cabinet's.

Procedure: steps in order

1. Proclamation. The President declares the emergency. Only the President's satisfaction is needed.
2. Laying. The proclamation is placed before each House of Parliament [2].
3. Approval. Both Houses must pass resolutions approving it within 2 months, by simple majority. A simple majority means more votes for than against, counting only the members present and voting.
4. If the Lok Sabha is dissolved: suppose the Lok Sabha is dissolved, or dissolves within the 2 months, and the Rajya Sabha has already approved. Then the proclamation lasts until 30 days after the new Lok Sabha first sits. The new Lok Sabha must approve it within that time. This works the same way as under Art. 352 [2].
5. Duration. Once approved, it lasts until revoked. It has no maximum period and needs no renewal.
6. End. The President can revoke or vary it at any time through a later proclamation [2]. Parliament's approval is not needed to revoke it.

Effects: what the Union can do

On the states:

• Directions on spending. The Union can direct any state to follow "canons of financial propriety" [2].
• These are basic rules of honest and careful public spending: no waste, no spending beyond need, and no spending that benefits the officer who approves it.

• The President can also give any other directions needed for the purpose [2].

• Salary cuts. The Union can order cuts in the salaries and allowances of all or any class of people serving the state [2].

• Reservation of bills. The Union can require all money bills and other financial bills (bills covered by Art. 207) to be reserved for the President's consideration after the state legislature passes them [2].
• A money bill is a bill only about taxes, government borrowing or spending from the state's Consolidated Fund.
• As a result, the state legislature loses the final say over its own budget.

On the Union:

• The President can order cuts in the salaries and allowances of all or any class of Union employees, including Supreme Court and High Court judges [2].

Why the cut in judges' pay matters:

• Art. 125 (Supreme Court) and Art. 221 (High Courts) say a judge's salary cannot be changed to the judge's disadvantage after appointment.
• This rule protects judicial independence, meaning judges can decide cases without fearing the government.
• A financial emergency is the only exception to this rule.

Limits: what it does not do

• It does not suspend fundamental rights. Only Arts. 358–359 can do that, and only during a national emergency.
• It does not remove the state government or dissolve the state legislature. Only President's rule does that.
• Unlike Art. 352, the Lok Sabha alone cannot vote it out.

In the Constitution and practice

• Where it sits: Article 360, Part XVIII (Arts. 352–360).
• Origin in the Constituent Assembly:
• Dr B.R. Ambedkar moved the draft article on 16 October 1949 [2][3].
• Model: the US National Industrial Recovery Act, 1933, passed under Franklin D. Roosevelt during the Great Depression. It let the President control wages and prices in industry [3].
• The US Supreme Court struck that Act down in 1935 because it went against federalism [3]. Federalism is the sharing of power between the Centre and the states.
• Ambedkar argued that this judgment weakened Roosevelt during a crisis, so India should give the Union this power in the Constitution itself [3].
• H.N. Kunzru feared it would destroy the states' financial freedom. K.M. Munshi replied that the powers were temporary and that a linked financial system needs one central response [2][3].

• All amendments were rejected, and the article was adopted unchanged [2][3].

• Judicial review is the power of courts to check whether a government action follows the Constitution.

• 38th Amendment Act, 1975: added clause (5), which made the President's satisfaction final and conclusive. No court could question it.
• 44th Amendment Act, 1978: deleted clause (5). Courts can now review the proclamation.

• S.R. Bommai v. Union of India (1994): this case was about Art. 356. The Court held that the President's satisfaction must rest on relevant material and can be tested by courts. The same reasoning would likely apply to Art. 360.

• Never used:

• 1991 balance-of-payments crisis. India's foreign exchange reserves had almost run out. Gold was pledged abroad and IMF support was taken. The crisis was handled through ordinary policy (the 1991 reforms), not Art. 360.
• COVID-19 (2020). Some people called for Art. 360. The Union instead used the Disaster Management Act, 2005 [6] and the Epidemic Diseases Act, 1897.
  • The NDMA (National Disaster Management Authority) directed social distancing for 21 days from 25 March 2020 [5].
  • The lockdown orders were issued under Section 10(2)(l) of the DM Act [4].

Don't confuse with

• National emergency (Art. 352): approval within 1 month by special majority, with renewal every 6 months. It can suspend fundamental rights, and the Lok Sabha alone can end it. A financial emergency needs approval within 2 months by simple majority, has no renewal, and does not touch fundamental rights.
• President's rule (Art. 356): the Union takes over the state government, renews it every 6 months, and can keep it for up to 3 years. It has been used 100-plus times. A financial emergency only controls state finances, has no time limit, and has never been used.
• Arts. 358–359 (suspension of rights): these apply only under a national emergency. Art. 360 has no effect on fundamental rights.
• Art. 293(3) borrowing consent: a normal, everyday control. A state that still owes money to the Union needs the Union's consent to borrow. No emergency is needed for this.

Prelims Hooks

• Art. 360 can be declared for a threat to the financial stability or credit of India or any part of its territory. A single state's crisis is enough.
• Approval comes within 2 months, by simple majority in both Houses. Once approved, it lasts until revoked, with no maximum period and no renewal.
• It is the only situation in which Supreme Court and High Court judges' salaries can be cut, so it is an exception to Arts. 125 and 221.
• State money bills and financial bills (Art. 207) can be reserved for the President.
• 38th Amendment (1975) made the President's satisfaction final (clause 5). The 44th Amendment (1978) deleted that clause.
• Trap: it does not suspend fundamental rights, and the Lok Sabha alone cannot disapprove it. It was never used, even in 1991 or 2020. The 2020 lockdown used Section 10(2)(l) of the Disaster Management Act, 2005 [4].

Mains Points

• Risk to federalism.
• Once approved, Art. 360 lets the Union control state budgets, salaries and money bills with no time limit.
• Kunzru feared this could turn India's federal system into a unitary one, with all power at the Centre.

• One reform idea is a fixed maximum period, like the 3-year cap in Art. 356.

• Is it no longer needed?

• The Union already has financial leverage over the states through Art. 293(3) borrowing consent, FRBM laws that cap deficits and debt, and Finance Commission transfers (Art. 280).
• Crises have been handled under ordinary law, not by proclamation: the 1991 reforms and the Disaster Management Act, 2005 in 2020 [4][5].

• A middle view: Art. 360 is a last-resort reserve power. Never using it shows restraint. It does not prove the power is useless.

• Judicial independence versus national crisis.

• Cutting judges' pay breaks the normal protection of Arts. 125 and 221. The Constitution accepts this as shared sacrifice in a real emergency.
• After the 44th Amendment and S.R. Bommai (1994), courts can check misuse, so the risk is lower.
• Ambedkar's use of the US experience in 1933–35 shows why a federation may need such a power written into its Constitution [3].

Read more

• Financial emergency (Art. 360)