Supreme Court Reserves Verdict On Kerala's Plea For Interim Relief In Original Suit Challenging Centre's Borrowing Curbs

The plea was heard by a bench of Justices Surya Kant and KV Viswanathan, which has been trying to find a solution to the state's urgent financial needs before the end of the current financial year on March 31, 2024. 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.

Over the last few weeks, the bench actively encouraged dialogue between the state and union governments to resolve this deadlock.

The Centre initially agreed to allow an additional borrowing of Rs 13,608 crores provided that the State of Kerala withdrew its suit. However, this was met with objections from the bench, with the judges making it clear that the union government could not insist on the withdrawal of the pending litigation as a condition for a bailout in view of Article 131 of the Constitution. Responding to the union government's proposal, the State of Kerala pointed out that the amount of Rs 13,608 crores would only cover a fraction of Kerala's immediate financial requirements.

Subsequent talks also yielded no result as the central government refused Kerala's request to allow borrowing of Rs 19,351 crore, citing concerns over the state's budget deficit. However, the top court pressed the Union to consider some flexibility in the borrowing limits, especially in light of Kerala's urgent financial needs.

As a one-time measure, the court also suggested a relaxation of Kerala's borrowing limit for the current financial year, subject to more rigid conditions in the next one. In response to this recommendation, the Centre agreed to allow an additional borrowing of only Rs 5,000 crores subject to several conditions, one of which was that the amount would be deducted from the state's next borrowing ceiling for the first nine months of the financial year (FY) 2024-25.

However, this proposal was rejected by the State of Kerala last week, leading to a new impasse in the ongoing financial tussle. Represented by Senior Advocate Kapil Sibal, the state government maintained that this amount was inadequate to meet essential obligations such as public fund disbursements, pensions, and pay revisions. Kerala also contended that the Centre's concession was based on a presumption that it was not entitled to the additional borrowing.

In view of the negotiations breaking down, Sibal insisted on arguing for interim relief, stressing that the prima facie case and the balance of convenience were in the state's favour and highlighting the 'irreparable injury' caused to it if the additional borrowing is not permitted. Additional Solicitor General N Venkataraman, appearing for the Union of India, readily agreed to argue against the grant of interim relief.

This week, the bench heard the counsel for both parties on the question of interim relief. After considering their detailed submissions, the bench reserved its verdict on Friday.

The original suit, challenging the Ministry of Finance's directives and amendments to the Fiscal Responsibility and Budget Management Act, highlights the lowered borrowing limit imposed on the state, potentially precipitating a severe financial crisis. The Kerala government has contended that the state urgently requires around Rs 26,000 crore to meet its financial obligations. According to the suit, the state's exclusive authority to regulate its finances was being encroached upon by the Centre, leading to substantial arrears in welfare schemes and other commitments. The Pinarayi Vijayan-led government has underscored the imperative for the state to exercise its constitutional rights to borrow in alignment with its budgetary requirements, essential for the progress, prosperity, and development of the state.

What did State of Kerala argue?

This legal battle saw the State of Kerala vehemently opposing the Union's limits on its borrowing powers, asserting its right to financial autonomy.

Among other things, Sibal argued that the central government's restrictions were tantamount to executive overreach. In this connection, he pointed out that Kerala's borrowing from the union government had significantly reduced from 98 percent to 2.9 percent after liberalisation. He objected to the Union's attempt to manage the state's financial affairs, highlighting the 'symmetry' in constitutional provisions that grant each state the authority to decide its budget and borrowing needs.

In a fervent defence of Kerala's fiscal position, Sibal contended that the state was well within the fiscal deficit limits and that the Union's restrictions were constitutionally impermissible. He questioned the Union's authority to disentitle Kerala from market borrowing despite Finance Commission recommendations as well as available 'borrowing space', arguing –

“The union government, using its executive power, cannot disentitle us from borrowing from the market despite the Finance Commission recommendations. The Finance Commission is a constitutional body. The union government cannot do this under any provision of the Constitution.”

“Of course, we have to manage our resources,” Sibal admitted, before arguing that the 15^th Finance Commission, when fixing Kerala's fiscal deficit beyond the normal 3 per cent, at 4.5 per cent, was aware of the state's overborrowing in the preceding financial year.

“…They knew about it and did not provide for adjustment of overborrowing. On the other hand, it said that any amount underutilised can be adjusted. But a [ruling against us] would have to assume that the Finance Commission was not aware of this.”

Moreover, Sibal emphasised the sustainability of Kerala's borrowing and questioned the Union's sudden objections. Highlighting Kerala's history of responsible financial management, he stating -

“Since 1960, our state has never defaulted. You think the experts in our state and the decision-making authorities are not cognizant that they have to pay back the liability when it arises? Do you think we are so irresponsible? Besides, the market will not allow me to sell my bonds if they are deemed to be unsustainable...But the Union cannot, through an executive order, stop us from approaching the market.”

“They are trying to prejudice the court when even based on their own figures, we are entitled to additional borrowing of Rs 10,000 crores,” the senior counsel argued. He further questioned the Union's sudden insistence on adjusting Kerala's overborrowing, stating, “Can Union of India adjust anytime, without any notice, without anything? If there's a right, they have waived that right.”

Finally, he contended that granting interim relief would not cause irreparable harm to the Union, emphasising again that the balance of convenience tilted in Kerala's favour. “This can be adjusted later after Your Lordships hear it. What is the prejudice caused to them? What is the irreparable harm caused to them? If there's no irreparable harm...where is the balance of convenience in their favour?”

 What did the Union of India argue?

The Union of India, on the other hand, presented a contrasting narrative. Additional Solicitor General Venkataraman alleged misrepresentation of figures by Kerala and asserted that the state had consistently overborrowed in recent years. 

The law officer countered Kerala's claims, stating that the state's revenue deficit indicated an unsustainable financial situation. He emphasised that Kerala has consistently borrowed beyond their prescribed amounts in the recent past, further casting doubts about the state's macroeconomic stability.

Emphatically arguing that the State of Kerala has 'poor financial indicators', ASG Venkataraman said –

“An analysis of Kerala's situation shows that it has poor financial indicators like high outstanding liabilities as a percentage of GSDP at 39 per cent, high committed expenditure as a percentage of revenue at 82.40 per cent, high revenue deficit as a percentage of GSDP at 3.17 per cent, high fiscal deficit as a percentage of GSDP at 4.94 per cent, low capital expenditure as a percentage of GSDP at 1.52 per cent, low capital expenditure as a percentage of total expenditure at 8.85 per cent, high proportion percentage of interest payments to revenue receipts at 19.98 per cent, high revenue expenditure to revenue receipt ratio at 125.33.”

He also questioned the need for interim relief now, pointing out that 14 such requests made by the chief ministers of nine states had been rejected in the past.

In a separate intervention, Attorney General R Venkataramani defended the Union's position, stating that Kerala's own act dictated the state's fiscal discipline. 

"Their own act says that they will govern their own fiscal discipline. Now for them to go beyond that and say that they will look at instances or aspects relating to union financing or union borrowing is completely besides the point," AG Venkataramani asserted.

The attorney general also stressed that there was no breach of the Finance Commission's recommendations as claimed by the other side.

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