INTRODUCTION

Recently, the Government of India announced its Union Budget for the financial year 2022-2023 with an estimated economic growth of 9.2%. The term 'Budget' generally used by various governments in day-to-day parlance does not find its definition under the Constitution of India ("Constitution"). Rather, the Constitution of India under Articles 112 and 202 provides for an 'Annual Financial Statement' wherein the President of India and Governor of a State respectively lay down a statement of the estimated receipts and expenditures of the respective government for that relevant financial year. This Annual Financial Statement, which is termed as Budget in common parlance, consists of inter alia expenditure to be charged from the Consolidated Funds of India/State. Interestingly, under Article 112(3)(c) of the Constitution, the debt charges for which the Government of India is liable to include interest, sinking fund charges and redemption charges, and other expenditure relating to the raising of loans and the service and redemption of debt, are all those expenditures which are charged upon the Consolidated Fund of India1.

In this backdrop it becomes pertinent to understand and discuss as to whether the Consolidated Funds could be earmarked by the Government (Union or State) for realisation of the debt liabilities of the Government, specifically borrowing(s) by a government-owned corporation? To understand and answer this complex question, reference to certain Reserve Bank of India ("RBI") Master Circulars needs to be made to comprehend the legal backing to such an action of a government.

RELEVANCE OF RESERVE BANK OF INDIA MASTER CIRCULARS

One contention which could be raised from those questioning this mode of usage of Consolidated Funds by a government, is that being an expenditure forming part of the Consolidated Funds the same cannot be leveraged as a security against any loan taken by a government-owned company. As the argument goes is that the Consolidated Funds consists of public money, including a major portion from taxes paid by citizens of the country which should not be misappropriated by any government for paying towards borrowing of one of its own companies. In this regard, Paragraph 2.3.7.3 (iii) of the RBI Master Circular – Loans and Advances – Statutory and other Restrictions2 ("Master Circular on Loans and Advances") provides that:

"In respect of projects undertaken by public sector units, term loans may be sanctioned only for corporate entities (i.e. public sector undertakings registered under Companies Act or a Corporation established under the relevant statute). Further, such term loans should not be in lieu of or to substitute budgetary resources envisaged for the project. The term loan could supplement the budgetary resources if such supplementing was contemplated in the project design. While such public sector units may include Special Purpose Vehicles (SPVs) registered under the Companies Act set up for financing infrastructure projects, it should be ensured by banks and financial institutions that these loans/investments are not used for financing the budget of the State Governments. Whether such financing is done by way of extending loans or investing in bonds, banks, and financial institutions should undertake due diligence on the viability and bankability of such projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations and that the repayment/servicing of debt is not out of budgetary resources". 

Here the term "Budgetary Resources" as provided for in Master Circular on Loans and Advances has not been defined anywhere. However, the best source through which the meaning of the term "Budgetary Resources" could be fathomed is from the definition of "Budgetary Allocation" as provided for in RBI Master Circular – Interest Rates on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non-Resident (External) (NRE) Accounts3 ("Master Circular on Interest Rates"). Paragraph 2.1 (h) of the Master Circular on Interest Rates has defined "Budgetary Allocation" as:

"Budgetary allocation" means the allocation of funds by the Government made through the budget, wherein all the Government's expenditure is reflected. Any institution, irrespective of the fact that it is a Government Department, SemiGovernment or Quasi-Government Body, which receives grants, loans or subsidies from the Government is said to depend on budgetary allocation. Government grants to institutions are also in the nature of the budgetary allocation. "Budgetary allocation" means the allocation of funds by the Government made through the budget, wherein all the Government's expenditure is reflected. Any institution, irrespective of the fact that it is a Government Department, SemiGovernment or Quasi-Government Body, which receives grants, loans or subsidies from the Government is said to depend on budgetary allocation. Government grants to institutions are also in the nature of the budgetary allocation. 

Therefore, the term "Budgetary Resources" as used in the Master Circular on Loans and Advances is capable of being understood as allocation of funds by the Government through the budget as part of government expenditure for a particular financial year. These covers granting of budgetary resources to a government-owned company as well, in light of the definition of "Budgetary Allocation" as provided for in Master Circular on Interest Rates.

Quite evidently what could be understood from the combined reading of both, i.e., Master Circular on Loans and Advances and Master Circular on Interest Rates that the RBI intended to ensure that whenever a loan is being sanctioned by banks and financial institutes for any project run by any government owned company, the debt servicing of such loan should be done from the revenue generated from such project, and in no case budgetary resources as part of expenditure from the Consolidated Funds should be used for repayment or servicing of debt.

This brings us to ponder over the finality of this current question in position, as to whether the above-mentioned RBI Master Circulars debars usage of a portion from Consolidated Funds for securitizing borrowing of a government owned company or an understanding opposite to such could be on cards as an escape mechanism to fall on? In this light, it becomes imperative to reflect upon what the constitutional provisions and decisions of courts of this country have to serve on this issue in question.

CONSTITUTIONAL PROVISIONS AND GOVERNING PRECEDENTS

Article 266 - Consolidated Funds and public accounts of India and of the States

(3) No moneys out of the Consolidated Fund of India or the Consolidated Fund of a State shall be appropriated except in accordance with law and for the purposes and in the manner provided in this Constitution.

Article 292 – Borrowing by the Government of India

The executive power of the Union extends to borrowing 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.

Article 293 - Borrowing 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.

A conjoint reading of Article 266(3) and Article 2924 of the Constitution of India shows that the Union/State Governments are empowered to appropriate moneys out of the respective Consolidated Funds of India/ States subject to authorisation by law as well as securitize borrowings, within certain specified limits, from the Consolidated Funds upon giving of guarantees as fixed by the Parliament of India/Legislature of such State. However, the governments cannot whimsically go on appropriating and borrowing from the Consolidated Funds without an authorisation by law, in other words without the force of law. The condition precedent of "accordance with law" under Article 266(3) has been emphasised by the Hon'ble Supreme Court in the landmark case of Rai Sahib Ram Jawaya Kapur and Ors. vs. The State of Punjab5 wherein it discussed the validity and scope of 'Appropriation Acts' and held that -

"As soon as the Appropriation Act is passed, the expenditure made under the heads covered by it would be deemed to be properly authorised by law under Article 266(3) of the Constitution. The expression 'law' here obviously includes the Appropriation Acts. It is true that the Appropriation Acts cannot be said to give a direct legislative sanction to the trade activities themselves. But so long as the trade activities are carried on in pursuance of the policy which the executive Government has formulated with the tacit support of the majority in the legislature, no objection on the score of their not being sanctioned by specific legislative provision can possibly be raised. Objections could be raised only in regard to the expenditure of public funds for carrying on of the trade or business and to these the Appropriation Acts would afford complete answer".

The aforesaid landmark judgment has been time and again relied upon by the Apex Court to discuss the extent and scope of executive powers of the governments vis-à-vis the borrowings from the Consolidated Funds and lay down a clear and thorough procedure that the governments (Union and States) shall necessarily follow for appropriating money out of the respective Consolidated Funds.

At the same time, the Apex Court in another landmark decision in the matter of Mathew vs. Union of India6 has discussed the borrowing powers of the Union and State Governments concerning Articles 292 and 293 of the Constitution respectively, wherein inter alia the Apex Court has held that Consolidated Funds can be utilized by the governments for giving guarantees. The relevant portion is produced herein below:

"A perusal of Art. 292 shows that in exercise of the executive power, the Central Government is empowered to borrow "upon the security of the Consolidated Fund of India." The limits, if any, can be "fixed by Parliament." Such limits can be imposed only "by law." It is further clear that such law can impose limits even in respect of giving of guarantees. Similarly, by Cl. (1) of Art. 293, the States are placed in an identical position. In other words, the two provisions empower the Governments of India and the States to borrow money. The Constitution does not say that the borrowing has to be 'up to' the amount of money available in the Consolidated Fund. The framers have used the expression 'upon the security of'. Still more, it is only by law that the Central and the State Legislatures can impose limits upon the borrowing. Such limits are not embodied in Arts. 292 and 293 of the Constitution. Thus, the contention that the two provisions place an embargo on the power of the executive to borrow cannot be sustained. In fact, the plain language suggests that the two Articles primarily contain enabling provisions. These authorize the respective Governments to borrow. Also to enact laws to regulate the borrowing. These do not place a limit or an embargo."

Further, the constitutional procedure for enacting an 'Appropriation Act' has been enshrined under Article 114(1)7 of the Constitution which provides that as soon as grants under Article 1138 of the Constitution is made by the House of People, there shall be introduced a Bill for the appropriation out of the Consolidated Funds of India of all money required to meet the grants so made by the House of People. Hence, provisions of Article 114 of the Constitution of India empower the Union to withdraw money from the Consolidated Fund of India, provided an 'Appropriation Bill' is passed by the Legislative Assembly having the authority of law under the Constitution of India.

'Appropriation Acts' allow the governments to withdraw funds from the respective Consolidated Funds to introduce and finance various social, economic and welfare development schemes for the holistic development of people of the state and uplift the marginalised and impoverished communities. Whether or not the governments (Union and State) endeavour to spray across the benefits of the socio-economic schemes to the target communities by way of 'Appropriation Acts' is an altogether different question. However, said 'Appropriation Acts' enacted for furthering the cause of such schemes are constitutionally valid and no challenge to the said Acts shall sustain provided they have been approved and authorised by the House of the People/Legislative Assembly of the State. In one such case of Bhim Singh v. Union of India9, the Hon'ble Supreme Court was called upon to decide on the constitutional validity of Mplad  Scheme (Members of Parliament Local Area Development Scheme) wherein certain funds earmarked from the Consolidated Fund of India for implementation of the  Mplad  Scheme were in 'accordance with law' and the Apex Court answered in affirmative by holding that:

"If we analyse the abovementioned articles and the Rules of Procedure, the argument that the Appropriation Act by itself is not sufficient to satisfy the requirements of Article 266(3) cannot be accepted. It is true that the activity of spending monies on various projects has to be separately provided by a law. However, if the Union Government intends to spend money for public purpose and for implementing various welfare schemes, the same are permitted by presenting an Appropriation Bill which is a Money Bill and by laying the same before the Houses of Parliament and after getting the approval of Parliament, Lok Sabha, in particular, it becomes law and there cannot be any impediment in implementing the same so long as the scheme is for the public purpose.

The law referred to in the Constitution for sanctifying expenditure from and out of the Consolidated Fund of India is the Appropriation Act, as prescribed in Article 114(3) which mandates that no money shall be withdrawn from the Consolidated Fund of India except under appropriation made by law based in accordance with the provisions of this article. It provides that after the estimates of expenditure laid before the House of People in the form of "demands of grants" have been passed, a Bill is to be introduced to provide for the appropriation out of the Consolidated Fund of India of all monies required to meet the grants made by the House of People. In other words, withdrawal of monies for the scheme is done only by means of an appropriation made by law in accordance with the provisions of Article 114. In pursuance of the aforesaid constitutional provisions, it is pointed out on the side of the Government that upon demand of grant having been made under Article 113, Appropriation Bills were introduced and enacted in each year to appropriate monies for the purposes of the  Mplad  Scheme. In such circumstances, it is reasonable to accept that appropriation of public revenue for the purposes of the  Mplad  Scheme has been sanctioned by Parliament by Appropriation Acts. As rightly pointed out by learned amicus curiae and learned Additional Solicitor General, the "law" here is the Appropriation Act, traceable to Article 114(3) and the purpose is for the Scheme and the monies withdrawn for outlay for the Scheme from out of the Consolidated Fund of India in the manner as provided in the Constitution".

CONCLUSION AND AUTHORS' ANALYSIS

The Constitution defines the scope of executive power of the Union and the State Governments. This executive power is broad. However, it appears that to put the matter beyond any shadow of doubt and to enforce a kind of fiscal discipline, the framers of the Constitution made specific provisions in respect of 'borrowing' by the State and the Union Governments. These are contained in Chapter II of Part XII of the Constitution in Arts. 292 and 293 of the Constitution.

Similarly, Article 114 of the Constitution10 empowers the Union to withdraw money from the Consolidated Funds of India, provided an 'Appropriation Bill' is passed by the Parliament having authority of law under the Constitution. Objections could be raised only in regard to the expenditure of public funds for carrying on of the trade or business and to these the 'Appropriation Acts' would afford complete answer.

Borrowing under Article 292 is by executive action and it is on the security of the Consolidated Fund of India. A similar power is granted to the Executive of the State by Article 293. This is not a legislative power except insofar as the law may be made to fix the limits of borrowing and to the giving of guarantees within such limits. Otherwise it is a power for the exercise of the Executive11. In this context, it is imperative to note that the Consolidated Funds do not represent a concrete figure. It is truly floating. Equally, the Consolidated Funds does not represent the entire wealth of the Nation or even of a State. It is only a figure showing the receipts at a given point in time.

Still further, the Constitution confers power on the Parliament and the State Legislatures to impose limits only by making law. Till such a law is made, it cannot be said that the Governments are legally debarred from borrowing. Therefore, the RBI Master Circulars being 'bye-laws' by nature cannot overpower the constitutional provisions allowing governments to earmark portion from respective consolidated funds for realisation off debt liabilities of the governments, which very well can include government owned companies as well.

Footnotes

1. Similarly, for State kindly refer to Article 202(3)(c) of the Constitution.

2. Reference No. RBI/2015-16/95/ DBR. No. Dir.BC.10/13.03.00/2015-16, dated 01.07.2015.

3. Reference No. RBI/2012-13/75 DBOD. No. Dir.BC.1/13.03.00/2012-13, dated 02.07.2012.

4. In the case of the State Government, Article 266(3) read with Article 293(1) of the Constitution.

5. Rai Sahib Ram Jawaya Kapur and Ors. vs. The State of Punjab, AIR 1955 SC 549.

6. Mathew vs. Union of India, 2003 (SCC) OnLine Ker 12.

7. Article 204(1) of the Constitution in case of the State Governments.

8. Article 203 of the Constitution in case of the State Governments.

9. Bhim Singh vs. Union of India, (2010) 5 SCC 538.

10. Article 204 of the Constitution in case of the State Governments.

11. Hari Krishna Bhargav vs. Union of India, (1966) 2 SCR 22.

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