CPR215 | Protecting Public Funds: State Liability for Sovereign Debt Management, Taxation, and Public Spending

Decisions made by institutions of the State on public debt, spending, and taxation have ramifications for our collective as well as individual outcomes. Public debt management has to balance multiple considerations – price stability, potential crowding-out of private spending and investment, and capacity for public spending. Constraints on budgets due to ill-thought out borrowing decisions (e.g., imposing a high cost of debt servicing) will inhibit necessary (e.g., public goods), productive (e.g., capital formation), countercyclical, and emergency (e.g., disaster relief) spending. Further, under utilisation of credit may put pressure on collection of tax revenues; and if taxes are designed for revenue maximisation, it will take away from their allocative, cost internalising, distributive, and emergency relief role that is critical for economic management. All these decisions need to be based on technical expertise and domain specialisation.

However, due to the legal-institutional design of public finance decision-making in India, there is a high degree of political (executive) control over decisions on borrowings, spending, and taxation. Short-termism of politicians (fueled by short-sightedness of voters) creates a risk that decision-making on public funds and their utilisation is based on the prospect of electoral gains. This may jeopardise macroeconomic parameters (e.g., inflation, employment, income), leave public needs unfulfilled, and also, lead to game theoretic treatment of budgets of institutions that are responsible for checking executive power.

Of late, there is growing recognition of the Union Executive’s control over the central bank, weak powers over the purse of the legislature and limited judicial and fourth branch accountability. Where robust ex ante and ex post safeguards to decision-making are absent, an inquiry into the scope for imposing liability on the State for public finance decision-making becomes necessary.

The scholarship on this matter is disaggregated and inadequate. This course will – (i) lay-out the legal-institutional arrangements for public finance decision-making in India; (ii) identify the possible causes of action (from decision-making on borrowings, spending, taxation); (iii) explore the extent to which the present legal framework in India can be invoked to make claims against the State; (iv) understand the doctrines, presumptions, legal defences, and practical challenges that make it onerous to hold the State liable; and (v) gain insights into the necessary legal-institutional reforms.