Borrowing by the Central Government and the State Government are governed by the Article 292 and 293 of the Constitution of India, which are reproduced as under :

Article 292 293 of The Constitution of India :-

"292. Borrowing by the government of India - The executive power of the Union extends to borrowing upon the security of the Consolidated Fund of India within such limits, if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such limits, if any, as may be so fixed."

"293. Borrowings by States -

1. Subject to the provisions of this article, the executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits, if any, as may from time to time be fixed by the legislature of such State by law and to the giving of guarantees within such limits, if any, as may be so fixed.

2. The Government of India may, subject to such conditions as may be laid down by or under any law made by Parliament, make loans to any State or so long as any limits fixed under article 292 are not exceeded, give guarantees in respect of loans raised by any State, and any sums required for the purpose of making such loans shall be charged on the Consolidated Fund of India.

3. A State may not without the consent of the Government of India raise may loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India or by its predecessor Government.

4. A consent under clause (3) may be granted subject to such conditions, if any, as the Government of India may think fit to impose."

The Constitution has specifically provided and directed the Parliament and the Assembly of the respective States to make law regarding limitations to provide minimum of borrowing and giving guarantees. Unfortunately, no action was taken for fifty years. No political party had taken steps for passing such an Act for the fifty years. Fiscal Responsibility and Budget Management Bill-2000 has been drafted, but is orphan child of the legislative process. It is reported that the Cabinet has now approved new version, which looks like a new resolution that an instrument of fiscal discipline.

Fiscal Responsibility and Budget Management Act, 2003 (No.39 of 2003 was passed and The President has given assent on 26th August 2004. Section 4 of the said Act is reproduced as under :-

Fiscal management principles -

1. The Central Government shall take appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by the 31.3.2008 and thereafter build up adequate revenue surplus.

2. The Central Government shall, by rules made by it, specify-
   
   (a) the annual targets for reduction of fiscal deficit and revenue deficit during the period beginning with the commencement of this Act and ending on 31.3.2008;
   
   (b) the annual targets of assuming contingent liabilities in the form of guarantees and the total liabilities as a percentage of gross domestic product Provided that the revenue deficit and fiscal deficit may exceed such targets due to ground or grounds of national security or national calamity or such other exceptional grounds as the Central Government may specify. Provided further that the ground or grounds specified in the first proviso shall be placed before both House of Parliament, as soon as may be, after such deficit amount exceed the aforesaid targets.

Since last two years the Government has to borrow above Rs.95000/- crore per year for non-plan expenditure. The Central has to wipe out revenue deficit within four years ending on 31-3-2008. The Central Government will have to levy taxes and raise revenue income of Rs.1,25,000/- crore per year in order to achieve the target.

The Present Finance Minister has presented two budgets and has not made any provision to increase the revenues but has made number of provisions to reduce revenue receipts and increase expenditure namely, (i) 80L limit (ii) Increase of tax rebate u/s.88B from 15000 to Rs.20000 to senior citizens (iii) To merge 50% D.A. with basic pay without reduction of 30% of staff, and without complying other recommendations of the Central Pay Commission etc..

State Level Fiscal Reform :
There is an encouraging sign which is reported in Indian Economic Survey 2002-2003 page 38 para 2.35, 2.36, 2.37 with regard to legislation on borrowings by states.

STATE LEVEL FISCAL REPORTS :

2.35 The State of Karnataka has passed the Fiscal responsibility Act. The Government of Maharashtra and Punjab have introduced a Fiscal Responsibility and Budget Management Bill in their States - Legislatures. The Government of Kerala has expressed it's intention to introduce the Fiscal Responsibility Bill in the State Legislature. These legislations aim at providing a statutory backing to the fiscal reform process initiated by the State Governments.

2.36 The Eleventh Finance Commission had recommended a monitorable fiscal reform programme for all the States. Fifteen percent of the revenue deficit grant, meant for 15 States during 2000-2005, and a matching contribution by the Central Government were recommended to be credited into an incentive fund for distribution as grants for all the 25 (which subsequently became 28) States based on their fiscal performance. Accordingly, the Government of India had drawn up the States Fiscal Reforms Facility 2000-2001 to 2004-2005 and an incentive fund of Rs.10,607 crore was earmarked to encourage States to implement Fiscal reforms Programme. So far, 18 States have drawn up medium term Fiscal reform Programme, in consultation with the Central Government. The fiscal reforms cover areas such as fiscal consolidation, public enterprise reform, power sector reforms, etc...

2.37 In order to address the growing debt burden of States, and to supplement the efforts of States in the direction of evolving their Medium Term Fiscal Reform Programme (MTFRP), a Debt Swap Scheme facilitated by the Government of India has been formulated. This scheme is focused on liquidating high cost loans given by the Government of India to the States. States have agreed to the revised Debt - Swap Scheme wherein 20% of net small savings proceeds releasable from September, 2002 are envisaged to be utilized for enabling States to prepay high cost Government of India loans and advances outstanding as on March 31, 2002. The participating States would be enables to further retire high cost Government of India loans and advances through allocation of additional market borrowings."

The author has given in following pages, number of suggestions to reduce interest payment liability, liability to reduce D.A., Pension, Subsidy and increase revenue receipts with regard to personal taxation only.