Kerala’s challenge is rooted in the principles enshrined in Article 293 of the Constitution, which it argues grants states the autonomy to manage their own debts without undue interference from the Central Government.
The State of Kerala has taken a firm stand against the Central Government’s attempt to impose borrowing limits, arguing that such actions infringe upon the state’s fiscal autonomy. This dispute, now before the Supreme Court, delves deep into the constitutional and fiscal dynamics of India’s federal structure, with Kerala asserting that the Union lacks the constitutional authority to control the debt of any state.
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Kerala’s Constitutional Argument Against Borrowing Limits
Kerala’s challenge is rooted in the principles enshrined in Article 293 of the Constitution, which it argues grants states the autonomy to manage their own debts without undue interference from the Central Government. The state’s affidavit, responding to a written note by the Attorney General for India, emphasizes that the Constitution does not confer any power upon the Union to control state debts. This argument is set against the backdrop of the Attorney General’s defense of the Centre’s actions as necessary for maintaining the macroeconomic stability of the nation, citing concerns over “reckless borrowing by states” and its impact on India’s credit rating.
The Centre’s Stance and Kerala’s Rebuttal
The Central Government, through the Attorney General, has argued that the debts of states affect the country’s overall credit rating and that financial mismanagement and “off-budget borrowing” through State-Owned Enterprises (SOEs) by states like Kerala necessitate central oversight. Kerala, however, contends that these assertions are largely rhetorical and fail to address the constitutional issues at hand. The state accuses the Centre of making disparaging and misleading statements about its financial management to divert attention from the core legal issues.
Fiscal Autonomy and the Division of Powers
Kerala’s affidavit highlights the distinct entries in the Seventh Schedule of the Constitution, which demarcate the autonomy of both the states and the Union regarding public debt. It argues that the Union’s consent for state borrowing, as per Article 293(3), is required only if there are outstanding dues from the state to the Union, a mechanism intended to protect the Union’s position as a creditor rather than to regulate state debts broadly.
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The Economic Context and Kerala’s Financial Management
Kerala challenges the premise that its borrowing could destabilize the economy, noting that the state accounts for a mere 1.70-1.75 percent of the total debt of the Centre and states combined for the period 2019-2023. It argues that the assumption of state financial profligacy is hypothetical and ignores the regulatory role of market forces and legislative limits on borrowing. Furthermore, Kerala criticizes the Centre’s own fiscal management, referencing reports by Moody’s and the IMF to argue that the Union’s policies pose a greater threat to macroeconomic stability.
The Supreme Court’s Role and Future Implications
As the Supreme Court prepares to hear the case, the outcome could have profound implications for the balance of fiscal powers between the Centre and the states. Kerala’s suit not only challenges the specific borrowing limits imposed by the Centre but also raises broader questions about the extent of federal oversight permissible under the Constitution. This case, therefore, stands as a critical examination of the fiscal autonomy of states within India’s federal structure, with potential repercussions for the financial governance of the country as a whole.
This legal battle between Kerala and the Central Government underscores the ongoing debate over the delineation of powers in India’s federal system, particularly in the realm of fiscal policy and debt management. As the Supreme Court weighs the arguments, its decision will likely set a precedent for how states and the Centre navigate their complex fiscal relationships, with significant implications for the constitutional principle of federalism in India.
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