The majority of Indian states have been severely impacted by the lockdown, with twenty-one reporting record losses in revenue. How will these states cope with the shortfalls in revenue? On May 17th, the Centre opened up one possibility by allowing states to increase their borrowing capacity from from three to five percent of their gross state domestic product. For states to take full advantage of this increase, they must undertake reforms in four sectors: ease of doing business, power distribution, rations, and urban local body revenue.
The four sectors in which reforms are mandated broadly fall under the State List, which means that the Central government does not ordinarily have a say in policymaking in this regard. However, Article 293(4) of the Constitution permits the Centre to impose conditions on states which borrow above the prescribed limit. While the article does not place explicit limitations on the scope of the conditions imposed on excessive borrowing, some commentators have argued that this provision must be narrowly interpreted due to its ‘potential of affecting the federal character of the Constitution’.
During the Constituent Assembly debates on this provision, one member commented that since India was no longer under colonial rule, it was unnecessary to include a proviso to Article 293 which permitted only reasonable conditions to be imposed. Implicit in his speech was the belief that the national government would respect the quasi-federal structure of India prescribed by the Constitution.
Some states have described the conditions imposed on excessive borrowing as antithetical to the notion of state autonomy. These leaders are echoing the worries of Kengal Hanumanthaiah, who warned that states must ‘be assured real autonomy…[with] sufficient powers and responsibility to manage their affairs well and efficiently’.
What is the purpose of these reforms? One reason could be that the government wishes to improve its standing in the Ease of Doing Business Index, and make India a more attractive destination for investment. The key to achieving this objective is the implementation of simple and consistent regulations, which can only be achieved if the states adopt the Central government’s policies in this regard.
The framers of the Constitution were proponents of cooperative federalism, where the Centre and the states worked together in the national interest while still accounting for the needs of individual states. Although the Central government may not be constitutionally prohibited from mandating reforms on subjects on the State List, the history of Article 293 suggests that a more consultative approach would be beneficial.
This leaves us with one final question: did the framers create sufficient constitutional safeguards for the autonomy of the states, especially during economic crises?