Kerala Govt Moves Supreme Court Against Centre Limiting State's Borrowing Capacity, Alleges Violation Of Fiscal Federalism

The State of Kerala has filed an original suit in the Supreme Court against the Union of India for imposing limits on the State's borrowing capacity. The State Government has said that the Centre has lowered the borrowing limit of the state, which can potentially lead to a grave financial crisis in the State. The Union's interference by the imposition of borrowing ceiling violates the principles of fiscal federalism, the Kerala Government has argued. 

The original suit has been filed under Article 131 of the Constitution which gives the Apex Court the original jurisdiction to settle disputes between a State Government and the Union Government in the country.

The borrowing limits and the extent of such borrowings are regulated by the Kerala Fiscal Responsibility Act, 2003. This Act sets specific targets for the State government to limit its fiscal deficits. The primary objective of this state legislation is to bring about fiscal consolidation, including reducing fiscal deficits and controlling public debt to maintain macroeconomic stability and sustainable economic growth, the state has informed the Apex Court.

Since Article 293 of the Constitution of India guarantees fiscal autonomy to the State, the State contends that it can borrowon the security or guarantee of the Consolidated Fund of the State.

The Kerala Government has argued that it has the exclusive power to regulate its finances through preparation and management of its budget and borrowings. The Constitution of India gives fiscal autonomy to States to regulate their finances under various articles but this now being curtailed by the Centre with various orders and amendments to the Fiscal Responsibility and Budget Management Act, 2003, the suit states. 

The State has challenged the Letters issued on 27.03.2023 and 11.08.2023 by the Ministry of Finance (Public Finance-State Division), Department of Expenditure, Government of India and the amendments made to Section 4 of the Fiscal Responsibility and Budget Management Act, 2003 through the Finance Act, 2018.

It is contended that these letters and amendments interfere with the finances of the State by :

(i) imposing a Net Borrowing Ceiling on the State in the manner deemed fit by the Union, which limits borrowings from all sources including open market borrowings; 

(ii) further reducing the Net Borrowing Ceiling (NBC) by including aspects into the “borrowing” of the State which, otherwise, are not “borrowings” as contemplated under Article 293 of the Constitution

(iii) by deducting liabilities arising from the Public Account of the State to arrive at the NBC; and

(iv) by deducting the borrowings by State-owned enterprises where the principal and/ or interest is serviced out of the budget or where such borrowings are made to finance schemes announced by the Plaintiff State, to arrive at NBC

(iv) imposing conditions in the guise of exercise of powers under Article 293(3) read with Article 293(4) that curtails the exclusive constitutional powers of the State.

The suit filed by the State says that a sum of around Rs 26,000 crores is imminently and urgently required for the State to avert the impending financial crisis.

“The ability to determine the borrowing of the State in order to balance the budget and make up the Fiscal Deficit is exclusively within the domain of the States. If the State is not able to borrow to the extent required based on the budget of the State, the State would not be able to complete its State Plans for the particular financial year. Therefore, it is essential for the progress, prosperity and development of the State and the people of the State that the State is able to exercise its constitutional rights and its borrowings are not impeded in any manner” the plea says. 

However, the Union is interfering with the finances of the State by imposing a Net Borrowing Ceiling on the State and by further reducing the Net Borrowing Ceiling by including aspects into the “borrowing” of the State which, otherwise, are not “borrowings” under Article 293 of the Constitution, the State Government contends in its plea.

“The Defendant (Centre) through the Impugned Amendments has encroached into the legislative domain of the Plaintiff (Kerala) State as “Public Debt of the State” is an item exclusively in the State List in the Seventh Schedule under Article 246 of the Constitution. The Impugned Amendments, which are ultra vires the Constitution would potentially be used to thwart the powers of the Plaintiff State. The Plaintiff State has a reasonable fear that the Defendant will use the Impugned Amendments to legitimise and legalise the executive actions of the Defendant in issuing the Impugned Orders, which are ultra vires the Constitution,” the plea states.

The State has informed the Court that due to this financial restraint it is not able to fulfil the commitments in its Annual Budgets. The financial constraints due to imposition of borrowing ceiling by Centre has resulted in huge arrears in welfare schemes, dues to various beneficiary groups, the employees of the State Government, its pensioners and dues to its State-Owned Enterprises, the State Government has said.

The State Government has stated that it estimates that over the next five years the net negative impact or loss sustained by the State's economy could be as high as Rs. 2 lakhs to 3 lakhs crores.

“If the damage is not prevented, the Plaintiff (Kerala)State, with its meagre resources, will not be able to recover from this for decades” the plea by the state says.

The suit was settled by Senior Advocate Kapil Sibal and filed through Advocate CK Sasi.

.

Case Title: State of Kerala V. Union of India