We Indians love politics and elections. The noise, festive atmosphere, energy, enthusiasm and heat surrounding elections in India is probably unmatched in the democratic world. In the midst of all this noise and heat, a far more important argument is going on before the Supreme Court. The State of Kerala instituted a suit against the Union of India under Article 131 arguing that the union has exceeded its powers under Article 293 by imposing a net borrowing ceiling on the state and enforcing it. The state sought a court injunction to mandate the union to permit the state to borrow violating fiscal norms. The Supreme Court, in its reasoned order on April 1, wisely denied the state’s prayer. The Bench comprising Justices Surya Kant and K V Viswanathan referred the substantive constitutional questions arising out of the case to a larger Bench comprising five judges.
Whichever alliance forms the next union government, the challenges to fiscal health and financial stability of the country and the credit of India are going stay with us. The future of the coming generations and that of the nation itself will be determined not merely by election verdicts, but by the borrowings, pattern of expenditure and future liabilities incurred by the central and state governments. As citizens and taxpayers we need to pay attention to this momentous issue before the Supreme Court. Jurists, experts in public finance and the union and state governments will be debating these matters in the court. But our future as a people is at stake, and all of us should be involved in this vital debate.
An individual, family, enterprise or government would have to manage their finances carefully and prudently; otherwise they will go bankrupt. Prudent management has four basis elements. First, our day-to-day expenditure should be within the regular income we derive. If we spend more than our income for current expenditure, we have to borrow, and the debt burden keeps increasing. As there is no surplus in our income after expenditure, the debt cannot be serviced or repaid. Even to service the debt (pay interest), we will have to borrow, leading to a debt trap. Such a situation of deficit in day-to-day budgeting (we call it revenue deficit in government) is not sustainable. Our children and successors will be inheriting a mountain of debt incurred by their parents and predecessors, without any assets or income to show for the past borrowings. No family or enterprise can survive such profligacy and it will end in financial ruin.
The second element is, if we incur future liability, say pension payments, we should provide for it now. Or else future expenditure increases without corresponding income, and the enterprise will go bankrupt. Ideally families save money every month, and keep it in reserve for a future expenditure. After that we buy assets, or deploy them in stocks or deposits to earn future income. Most of our governments in India are borrowing heavily to meet the current expenditure, and the debt is growing without corresponding assets or future income.
Third, it is not enough to utilise borrowings for investment. The money spent on building assets should be well-spent. There should be a proper cost-benefit analysis and we should ensure that the benefits outweigh the costs. In the name of assets if we build bridges to nowhere, or if ghost towns are built with nobody willing to live in them, then the borrowed money is wasted. There is major controversy in Telangana regarding the exorbitant cost of the Kaleswaram lift irrigation project. A capital expenditure of Rs 4-5 lakh is incurred per acre of irrigation, and the annual recurrent expenditure would be of the order of Rs 40-50,000 per acre per year. The net increase in income to the farmer on account of this irrigation is less than the cost incurred. Such expenditure of borrowed money even if it is for ‘investments’, will eventually bankrupt the state. Therefore we should ensure that borrowed money goes to build assets and enhance future incomes, and the investment should be sensible and cost-effective.
Fourth, even if we spend borrowed money for building assets and increasing future income, there is a limit beyond which we cannot sustain a debt level safely. If we borrow beyond our repayment capacity, then we will again be in a debt trap from which it will be difficult to come out, and we will have to sell the assets to discharge debt, or go bankrupt.
These principles — don’t borrow for day-to-day expenditure; save money now and provide for future liabilities; invest only when benefits outweigh costs; and don’t incur a heavy debt that is beyond your repayment capacity — apply to nations and constituent governments as well. That is why our Constitution makers wisely decided that financial stability and the credit of India are the Union’s responsibility. States are free to utilise the public money in whatever manner they deem fit to discharge their legitimate functions. But states’ rights do not include fiscal profligacy and unlimited borrowing, because the whole nation’s future is affected by any state’s actions. Article 293 and Article 360 have been carefully and deliberately incorporated in our Constitution. Our founders understood that fiscally the nation is indivisible, and a threat to financial stability of any part of India is a threat to the whole nation’s financial stability and future of our children.
The author is the founder of Lok Satta movement and Foundation for Democratic Reforms. Email: drjploksatta@gmail.com / Twitter @jp_loksatta
