'Centre Trying To Control State's Financial Affairs', Kerala To Supreme Court; Union Cites 'Poor Financial Indicators' & History Of Overborrowing

The court, led by Justices Surya Kant and KV Viswanathan, has been hearing Kerala's original suit against the Centre and actively trying to find a solution to the state's urgent financial needs before the end of the current financial year on March 31, 2024.

The ongoing financial tussle between the State of Kerala and the union government reached a new impasse last week with the former rejecting the latter's proposal to allow an additional borrowing of only Rs 5,000 crores. This came in response to the court's suggestion for a one-time measure to alleviate Kerala's financial constraints before the end of the current financial year on March 31, 2024.

However, Senior Advocate Kapil Sibal, representing Kerala, argued that this amount would not suffice. He also contended that the Centre's concession, which came with stringent conditions, was based on a presumption that the State of Kerala was not entitled to the additional borrowing.

"I can demonstrate that we are entitled to borrow this amount under the law," the senior counsel said, indicating the state's willingness to argue on the merits of interim relief in view of the negotiations breaking down. He added that the state government had 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.

With both parties agreeing to argue on interim relief, the bench directed the hearing on interim stay to be listed on Thursday, March 21.

Today, besides pointing out the state's adherence to fiscal responsibility norms, Sibal argued that Kerala's borrowing from the union government, after liberalisation, had significantly reduced from 98 percent to 2.9 percent. In view of this, he objected to the Union acting as an 'executive' and attempting to manage the state's financial affairs.

In this connection, the senior counsel emphasised the 'symmetry' in constitutional provisions, stating, “Each state is entitled to devise for itself what its programme should be, what its budget should be, how much should it spend, and how much should it borrow.”

Crucially, Sibal contended that Kerala's borrowing was well within the fiscal deficit limits, stressing that further restrictions imposed by the Union were constitutionally impermissible. He questioned the Union's power to disentitle Kerala from market borrowing despite recommendations by the Finance Commission, arguing –

“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. But the question for this court is that has the Finance Commission, taking into consideration the state's overborrowing in the 14th Finance Commission, has fixed a fiscal deficit beyond 3 per cent, at 4.5 per cent. Of course, 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.”

Next, Sibal stressed that Kerala's borrowing was sustainable and questioned the Union's sudden objections, noting –

“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.”

However, Additional Solicitor General N Venkataraman, representing the Union of India, had a different version. He 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 over 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 percentage of GSDP at 39 per cent, high committed expenditure as percentage of revenue at 82.40 per cent, high revenue deficit as percentage of GSDP at 3.17 per cent, high fiscal deficit as percentage of GSDP at 4.94 per cent, low capital expenditure as percentage of GSDP at 1.52 per cent, low capital expenditure as 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. CAG has reported that the state has failed to meet the target set in its medium-term fiscal policy. CAG has also reported that it failed to meet the target set by its legislature through the Kerala Fiscal Responsibility Act, 2003. This is something Your Lordships should bear in mind when deciding the question of interim relief."

He also questioned the need for interim relief now, pointing out, “14 requests have been made by nine states in the past. These requests have been made by the chief ministers. We have declined. They want overborrowing over and above the guidelines. We have refused this on 14 other occasions, so why this interim relief today?”

After hearing these submissions, the proceedings were adjourned by the bench. Both Kerala and the Union are poised continue their legal battle over the latter's borrowing curbs tomorrow.

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