Consider the following statements:
1. Both Union and State Governments in India can directly borrow from Domestic as well as Foreign Markets
2. To borrow from domestic markets, states need to get permission from Centre
Which of the above is / are correct?

Answer: [B] Only 2

This is a very good question and clears your fundamentals on the market borrowing scenario of the Central versus State Governments in India. We should note that practically, the states are in a subordinate position as far as market borrowings are concerned. The states are placed relatively in a disadvantageous position constitutionally compared to the centre. While the centre can borrow both in domestic and foreign markets, the states cannot borrow directly from abroad. Then, the states cannot borrow effectively even in the domestic market without taking permission from the central government and these borrowings are practically allocated by the centre to the states. Furthermore, state securities are not held by the RBI in its investment account though, of late, repos are permitted in state securities. Presumably, because of these reasons, state securities are sold at higher yields in auctions and hence have a spread over the auction yields  of central government securities ever since the auction system was introduced.

This question is a part of GKToday's Integrated IAS General Studies Module