Which of the following statements is/are correct regarding the borrowing powers of States in India?
1) A State requires the Centre's consent for internal borrowing if it owes any debt to the Centre.
2) No State can raise loans from foreign sources without prior approval of the Union Government.
Show answer & explanation
Correct answer: C
Explanation
The correct answer is option 3 i.e. Statement 1 and 2 are Correct.
Statement 1 is correct: Under Article 293(3) of the Indian Constitution, a State government cannot raise any fresh loan without the consent of the Union Government if it still has outstanding debts or liabilities owed to the Centre. Since almost all states have outstanding loans from the Union, the Centre's permission for internal borrowing is practically mandatory in most cases.
Statement 2 is correct: State governments are constitutionally restricted to borrowing only within India. They are not permitted to raise loans directly from foreign sources or international markets. Any external aid or foreign borrowing for a state must be channeled and approved through the Union Government, which acts as the borrower or guarantor.