Kerala Rejects Union's Offer To Allow Borrowing Of Rs 5K Crores With Conditions, Urges Supreme Court To Hear Suit On Merits
After the State insisted that it had the legal entitlement, the Court agreed to hear the plea for interim relief on March 21.
The Union Government on Wednesday (March 13) informed the Supreme Court it can give consent to an additional borrowing by the State of Kerala for an amount of Rs 5000 crores in the present financial year as a one-time measure. However, this will be subject to stringent conditions to be imposed the next Financial Year, Additional Solicitor General N Venkataraman informed a bench of Justices...
The Union Government on Wednesday (March 13) informed the Supreme Court it can give consent to an additional borrowing by the State of Kerala for an amount of Rs 5000 crores in the present financial year as a one-time measure. However, this will be subject to stringent conditions to be imposed the next Financial Year, Additional Solicitor General N Venkataraman informed a bench of Justices Surya Kant and KV Viswanathan.
"...in view of the court's suggestion, we can allow 5,000 crores that will be deducted from net borrowing ceiling for first nine months...Subject to certain conditions," ASG said.
Senior Advocate Kapil Sibal, appearing for the State of Kerala, refused the Centre's proposal, saying that the concession is based on a presumption that the State was not entitled to the additional borrowing.
"Rs 5000 crores will not take us anywhere, we need at least 10,000 crores. They are saying this on the assumption that the suit is liable to be dismissed," Sibal stated. He emphasised that under the recommendations of the Finance Commission, the State was entitled to this money. However, under the garb of giving a concession, the Centre was trying to impose conditions which could control the State's expenditures, the senior counsel argued, adding that such a measure would violate the principles of federalism.
"I can demonstrate that we are entitled to borrow this amount under the law," Sibal urged bench to hear the matter on merits for interim relief. He added that the State has a strong case for interim relief, stressing that the prima facie case and the balance of convenience were in its favour and highlighting that irreparable injury would be caused to it if the additional borrowing was not allowed.
Ultimately, the bench agreed to post the suit on March 21 for hearing on interim relief.
Court suggests that the State accept the Union's offer; State rejects citing Union's conditions
During the hearing, the bench suggested that the State accept the Rs 5000 crores. "We can only say that you want to persuade them to go from 5000 to 10000. You do that. In the meantime, you take the 5000 crores," Justice Kant said. However, Sibal said that the offer came with stringent conditions which will amount to the Union controlling the State's budget.
When the bench observed that the interim relief which the State was seeking amounted to the final relief, Sibal disagreed. "That's not correct. It will be subject to adjustment in next financial year. You may hear me for one, one and a half hours...Irreparable injury will be caused to the state. This is my legal right. This will trap us, we'll not be able to pay people. And then they say they will control our expenditure. It's against federal principles".
Conditions put by Centre to allow borrowing of Rs 5000 crores
ASG read out from the note as follows :
“Giving utmost consideration to the suggestion of this court, as a very special and exceptional measure, not to be used or cited as a precedent by any other state or on any other occasion, in order to help the State of Kerala to tide over its financial crisis and meet its financial liabilities, if the court should desire, the Government of India is ready to give its consent for borrowing of Rs 5,000 crores subject to the following conditions:
1. This amount will be deducted from the net borrowing ceiling of Kerala for the first nine months of FY 2024-25.
2. No ad hoc borrowing shall be granted for the year 2024-25.
3. Consent for borrowing in the year 2024-25 will only be issued on receipt of prescribed information and documents from the state government.
4. Consent for borrowing to Kerala in the first nine months of 2024-25 will be issued on a quarterly basis for upto 25 percent of the eligibility arrived at after deducting the early special concession of Rs 5,000 crores.
5. Government of Kerala will submit the 'Plan B' it has announced in its budget for 2024-25 for raising resources and improving financial position of the state and will put the plan into action before grant of borrowing consent for last quarter of 2024-25."
The ASG said that given the State's past expenditure trend, it would not be able to manage with this amount in the first nine months. This will, in all probability, trigger hardships for the people of Kerala.
The law officer also raised apprehensions that allowing a borrowing consent of Rs 15,000 crores, as requested by the state government, might propel the state into a financial crisis. He explained –
“They will have only Rs 21,664 crores for the first nine months. If out of this amount, an advance of Rs 15,000 crores is given early, it will be left with only Rs 6,664 crores. It will be extremely difficult for the state government to manage with this, especially given its past expenditure pattern.”
He also raised the apprehension of other States citing this as a precedent to seek additional borrowing.
Last week, the Centre had refused Kerala's request to allow borrowing of Rs 19,351 crore, citing concerns over the state's budget deficit. However, the top court, while acknowledging the need for fiscal prudence, pressed the Union to consider some flexibility in the borrowing limits, especially in light of Kerala's urgent financial needs.
Kerala's original suit against the Union under Article 131 of the Constitution challenges the Union's norms on borrowing limits, highlighting the state's unique financial landscape. In defence of its overspending, the state has emphasised its substantial investments in critical sectors like health and education, factors contributing to its commendable human development indices.
Senior Advocate Kapil Sibal, representing Kerala, highlighted the state's pressing need for additional borrowing to meet essential obligations such as public fund disbursements, pensions, and pay revisions. Sibal pointed out that the amount of Rs 13,608 crores, which the Centre had agreed to allow, would only cover a fraction of Kerala's immediate financial requirements.
Over the last few weeks, the apex court has been actively encouraging dialogue between the state and union governments to find a solution to resolve this deadlock.
Background
The genesis of this legal dispute dates back to December, when Kerala petitioned the apex court, denouncing what it deemed as undue interference from the central government in its fiscal affairs. The state asserted that certain directives and amendments issued by the Ministry of Finance were inhibiting its ability to fulfil budgetary commitments, thereby imperilling vital welfare schemes and developmental initiatives outlined in its annual budgets. Central to Kerala's grievances are concerns over a lowered borrowing limit imposed by the Union, potentially precipitating a severe financial crisis with the state urgently requiring around Rs 26,000 crore to meet its financial obligations.
In a written note submitted to the court, the union government defended its actions as essential measures aimed at safeguarding macroeconomic stability. Attorney General Venkataramani, on behalf of the Centre, emphasised the potential ramifications of unchecked state borrowing on the nation's credit rating and overall financial stability. The Union's stance rests on the premise that broader economic concerns necessitate centralised oversight to prevent fiscal imprudence at the state level.
However, the Kerala government, in an affidavit, vehemently opposed this narrative, arguing that the Constitution grants states autonomous authority over their public debts. The state's response challenges the Union's interpretation of Article 293, contending that the consent mechanism outlined in the provision primarily serves to protect the Union's position as a creditor, rather than conferring overarching powers to regulate state borrowing.
Not only this, Kerala countered the Union's assertions of fiscal mismanagement, citing its robust investments in social sectors like health and education, which have contributed to the state's commendable human development indices. The state government also critiqued the Union's fiscal track record, highlighting reports indicating India's precarious debt-to-GDP ratio and stagnant credit ratings.
Case Details
State of Kerala v. Union of India | Original Suit No. 1 of 2024