The Kerala government stated that the Centre had imposed limitations on its borrowing from various channels, including the open market. In response, the Centre attributed its financial strain to mismanagement, in the Supreme Court of India.
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Today (19 Feb 2024) the Supreme Court of India was briefed on the ongoing stalemate between the Central Government and the State of Kerala regarding the imposition of borrowing limits on the state. This deadlock has significant implications for Kerala’s financial autonomy and its ability to meet its budgetary commitments, sparking a legal battle that could redefine the contours of federal fiscal relations in India.
The heart of the dispute lies in the Central Government’s restrictions on Kerala’s borrowing capacity, a move that the state argues infringes upon its financial independence. The matter escalated to the Supreme Court, where a bench comprising Justices Surya Kant and KV Viswanathan is deliberating over Kerala’s plea for interim relief against these curbs. The state’s contention is rooted in what it perceives as an overreach by the Union Government into its fiscal domain, challenging the central directives that it claims unduly limit its borrowing ability.
Efforts to resolve this impasse through dialogue were initiated, as recommended by the Supreme Court in a previous hearing. A high-level meeting was convened, involving key officials from both the state and the central governments. Despite these discussions, Senior Advocate Kapil Sibal, representing Kerala, informed the court that the negotiations had not borne fruit, attributing the failure to the Centre’s reluctance to accommodate Kerala’s financial needs.
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The crux of the disagreement was highlighted by Sibal’s reference to the Centre’s proposal, which suggested conditional relaxations in borrowing limits contingent upon Kerala withdrawing its legal challenge. The proposal outlined three specific requests from Kerala, including relaxations in expenditure guidelines and additional borrowing space, subject to the state retracting its lawsuit.
“The first two requests would entail a relaxation of the guidelines of the department of expenditure, which are already under challenge in this suit. The third request is with respect to conditional borrowing. The power of the government to impose conditions has also been challenged by the state government. Therefore, if the State of Kerala agrees to withdraw the suit, the Government of India is willing to consider the aforesaid requests in view of the current precarious financial situation of the state,”
-Sibal read from the central government’s offer, expressing frustration over the deadlock.
In response, Additional Solicitor General N Venkataraman, representing the Centre, outlined the government’s stance, emphasizing the additional borrowing capacity already sanctioned to Kerala, which exceeded the statutory ceiling. Venkataraman’s statement underscored the Centre’s willingness to extend further financial leeway to Kerala, within the framework of “true federalism,” provided the state withdraws its legal challenge.
“Earlier, we exceeded by almost Rs 2,000 crores by consent. Now, we are saying that we will consent to additional borrowing space of Rs 13,608 crores plus an additional Rs 1,877 crores. So in total, Rs 15,000 crores plus Rs 2,000 crores in excess of the GSDP…It should be limited at Rs 32,000 crores but we are willing to allow Rs 49,000 crores in the spirit of true federalism. Then, if we ask them to withdraw the suit, how is it an unreasonable request?”
-Venkataraman argued.
The debate also touched upon the issue of power sector reforms, with Sibal lamenting the Centre’s alleged discriminatory treatment of Kerala in financial allocations for these reforms, a point contested by Venkataraman who highlighted the conditional nature of such support.
The Supreme Court, while acknowledging the complexity of the financial dispute and the broader implications of its potential rulings, expressed a preference for continued negotiation over litigation. Justices Kant and Viswanathan emphasized the importance of dialogue and mutual understanding in resolving the deadlock, hinting at the limitations of judicial intervention in such intricate fiscal matters.
This legal confrontation has its roots in Kerala’s challenge against central directives that it argues restrict its fiscal autonomy, a situation exacerbated by the state’s urgent need for financial resources to fulfill its commitments. The case, has brought to the forefront critical questions about the balance of fiscal powers between the state and the central government, the principles of federalism, and the constitutional safeguards of financial autonomy.
As the Supreme Court prepares for further hearings, the outcome of this legal battle could have far-reaching consequences for the fiscal federal structure of India, potentially setting precedents for how borrowing limits and financial autonomy are negotiated between the Centre and the states.
CASE TITLE:
State of Kerala v. Union of India
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