The Supreme Court Today (April 1st) issued a unified directive regarding Kerala’s request for interim relief and the state’s lawsuit against the central government’s restrictions on its borrowing capabilities. Kerala initiated legal action in the apex court under Article 131, alleging that the Centre infringed upon its authority to manage the state’s financial affairs.
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NEW DELHI: Today, the Supreme Court issued a common order addressing both Kerala’s plea for interim relief and the state’s lawsuit against the limitations imposed by the Centre on its borrowing powers. The apex court expressed initial inclination towards the Centre’s argument, suggesting that when a state excessively borrows from the Centre, subsequent payouts by the central government may be reduced, and thus, the balance of convenience favors the Union.
A bench comprising Justices Surya Kant and KV Viswanathan pronounced the order and referred the case to a five-judge constitutional bench. The court noted that at this stage, the balance tilts in favor of the Centre, emphasizing,
“Since Article 293 has not been so far subjected to any interpretation by this Court, we have referred this question to the 5-judge Bench.”
The bench recognized the significance of the suit filed by the Kerala government, highlighting the constitutional interpretation of Article 131 and 293. These articles raise fundamental questions regarding a state’s enforceable right to borrow from the Centre and the extent of judicial review. Consequently, the division bench framed six additional questions, beyond constitutional interpretation, for the consideration of the five-judge constitution bench.
Kerala’s legal action under Article 131 alleges that the Centre unjustly interfered with its authority to manage the state’s finances by imposing borrowing ceilings. However, the Centre contends that unchecked borrowings by states could adversely impact the country’s credit rating.
Kerala asserts that the Centre’s imposition of limits on its borrowing powers constitutes undue interference and argues that it requires over Rs 10,000 crore to address its financial needs. The state has sought a total of Rs 24,000 crore by March 31 to address an impending financial crisis.
In a previous hearing, Senior Advocate Kapil Sibal expressed gratitude for the release of Rs 13,000 crore by the Centre but affirmed that Kerala would persist with its legal battle in the Supreme Court for the additional funds it deems necessary and entitled to.
Kerala maintains that its borrowing request aligns with the constitutional framework and the recommendations of the Finance Commission. However, Additional Solicitor General N. Venkataraman argued that Kerala has a history of fiscal deficit, with expenditures far surpassing its income, leading the Centre to characterize Kerala as
“one of the most financially unhealthy States.”
Kerala Rejected Centre’s Offer
Before the top court began hearing the case on merits, it urged the Centre and State government to try finding a solution. Following which, ASG N Venkataraman appearing for Centre told the court that to help Kerala deal with its financial crisis and meet the end of the financial year liability of payment of pension, salary and other committed expenditure the Centre is ready to give a consent for a borrowing of Rs 5,000 crore by the state subject to some conditions.
In a note placed in court, the ASG said that Rs 5,000 crore will be deducted from the net borrowing ceiling of Kerala for the first nine months of FY 2024-25. He further said that the state will not be allowed any ad-hoc borrowing for FY 2024-25.
He further said that Centre will consent to Kerala’s borrowing in 2024-25 when Kerala submits the prescribed documents and the Plan B it has announced in its budget for improving its fiscal position.
The ASG also said that the Centre will give consent for borrowing to Kerala in the first nine months of FY 2024-25 on a quarterly basis for upto 25 percent of the eligibility arrived. And the special concession of Rs 5000 crores, will be deducted from it.
The Centre contended that if the Rs 15,000 crore borrowing demand by Kerala is allowed in advance in March 2024, the state will be left with a borrowing space of only Rs 6,664 crore to meet its requirements for the first nine months of 2024-25.
The ASG appearing for Centre in court said that if one looks at expenditure trends by Kerala, it will become extremely difficult for the state to manage its finances with the borrowing of Rs 6,664 crore in the first nine months of financial year 2024-25.
He cited figures from FY 2023-24, and said that Kerala was allowed a total borrowing consent of Rs 21,852 crore for the first nine months with an average amount of Rs 2,428 crore per month. However, this was exhausted by Kerala within the first six months with an average expenditure of Rs 3,642 crore per month.
Kerala government, however refused this offer by the Centre and pressed for the case to be heard on merits.
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