Kerala Requests Supreme Court To List Its Suit Against Union Over Borrowing Limits

On April 1 the bench of Justices Surya Kant and KV Viswanathan referred the suit filed by the State of Kerala against the Union of India challenging the limits imposed on the State's borrowing capacities to a 5-judge Constitution Bench in terms of Article 145(3) of the Constitution.

However, the bench refused to pass any order on the interim sought by the State additional borrowing for the financial year 2023-24.

Notably the main questions referred for the consideration by the larger bench are :

(a) What is the true import and interpretation of the following expression contained in Article 131 of the Constitution: “if and in so far as the dispute involves any question (whether of law or fact) on which the existence or extent of a legal right depends”?

(b) Does Article 293 of the Constitution vest a State with an enforceable right to raise borrowing from the Union government and/or other sources? If yes, to what extent such right can be regulated by the Union government?

(c) Can the borrowing by State-Owned Enterprises and liabilities arising out of the Public Account be included under the purview of Article 293(3) of the Constitution?

(d) What is the scope and extent of Judicial Review exercisable by this Court with respect to a fiscal policy, which is purportedly in conflict with the object and spirit of Article 293 of the Constitution?

Background

The genesis of this dispute dates back to December, when the State of Kerala approached the Supreme Court, denouncing what it deemed as encroachment by the central government over its fiscal affairs. The state asserted that certain directives and amendments issued by the Ministry of Finance were inhibiting its ability to fulfill budgetary commitments, thereby imperiling vital welfare schemes and developmental initiatives outlined in its annual budgets.

Central to Kerala's grievances were 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. It emphasized the potential ramifications of unchecked state borrowing on the nation's credit rating and overall financial stability.

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 further challenged 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.

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.

Case Title: State of Kerala v. Union of India | Original Suit No. 1 of 2024