With reference to the states’ borrowing power, consider the following statements:

1. Loan given by Central government to a particular state is charged on the consolidated fund of that state. 

2. At present, the states can borrow up to 5% of their gross state domestic product (GSDP). 

Which of the statements given above is/are correct? 

a) 1 only 

b) 2 only 

c) Both 1 and 2 

d) Neither 1 nor 2

Solution: 

• Article 293(3) of the Constitution requires states to obtain the Centre’s consent in order to borrow in case the state is indebted to the Centre over a previous loan. 
• The Central government can make loans to any state or give guarantees in respect of loans raised by any state. 
• Any sums required for the purpose of making such loans are to be charged on the Consolidated Fund of India. 
• The Centre increased the borrowing limit of states to 5% of gross state domestic product (GSDP) in 2020-21 from 3%. 
• However, incremental borrowing beyond 3.5% of GSDP will be linked to certain reforms undertaken by the states.

Ans: (b)