Kerala v. Union Suit On Borrowing Limits : Full Courtroom Exchange From Supreme Court Hearing

The Supreme Court on Wednesday (March 6) expressed disapproval of a condition imposed by the Union Government on the State of Kerala that the former will give consent for additional borrowing only if the latter withdrew the suit filed in the Supreme Court.

Senior Advocate Kapil Sibal : We have tried to resolve the issue within the spirit of cooperative federalism. But given the situation which the State is in, we have no choice but to agitate this matter. I want to disabuse your lordships of any intent on our part to seek any allocation from the Union. That is not our intent. I don't wish your lordships to decide what amount of money should be given to me. There are certain Constitutional principles involved, which your lordships should settle. At the moment, we are only on the interim relief.

Justice Surya Kant : Has there been any suit by any State in the past like this?

Sibal : Never. This is the first of this kind. Very unique.

Sibal : The economic landscape of the country is as diverse as its geographic and cultural landscape. For example hilly states like Uttarakhand, Himachal Pradesh and Arunachal, issues are different. In Kerala, there is a high density of population, and no scope for manufacturing. Only sources of income are tourism and IT. Human capital is the only source of progress. So you need to educate people. Compare it with Maharashtra- a manufacturing state, where stock markets are booming, biggest factories are there. The point I am making is the nature of the economy of each state and the budgetary allocation of each state are different.

Justice Kant : It is influenced by the local needs.

Sibal : If you look at the Constitution, you will realise that the powers and responsibilities of the Union as well as the States are symmetrical. There is no asymmetry in those powers of the Union and States. Total revenue collected 63% goes to Union. And they spend about 40%. In the States, it is the reverse. States spend more than they earn. Naturally, the allocation in terms of what all the States get is decided by the recommendations of the Finance Commission. Having said that, we, decide on our own budget. The Union cannot control our budget. Our budget is tailor-made to the needs of our people.

Another thing, in the absence of deficit financing, there can be no progress. If you spend whatever you earn, you won't be able to invest in capital assets, be it infrastructure or human capital. Those priorities are not decided by the Union, but by the State. All that the Union does is, share the revenue as recommended by the Finance Commission. The State decides the budget and the nature of expenditure. States also have the Fiscal Responsibility Act. So we cannot go beyond the limit of our fiscal responsibility. There is a free play in the joints for the States as long as we don't breach the fiscal responsibility.

Even if we borrow, we won't breach the Fiscal Responsibility Act. Union have always breached their fiscal responsibility. Even they are continuing to do it. Be that as it may. They have made very serious allegations against the State. If I start talking about the Union, I don't want to talk about it in public, it is part of the official records, part of the CAG, part of the Finance Commission. If we start going into that, then there is no point.

Justice Kant :  We are on legal points. Judicial platforms should not be used to damage the image of the States or Union.

Sibal : That's what they have done in their affidavit. We have to reply. So I request all parties to purely look at the legal issues.

Sibal :  Let's go back to independence days. Those days 98% of borrowing was from the Centre or its institutions. 12th Finance Commission....

J Kant : Borrowing is incidental to the deficit?

Sibal  : It has to be.

J Kant : Borrowing necessarily implies a schedule of repayment also?

Sibal :  Naturally. That the financial institutions will decide. What has the Union got to do with it? That the market will decide. We are not asking for money from Union.

J Kant : But subject to Constitutional approval?

Sibal : I will demonstrate that the Constitutional approval is in my domain.

12th Finance Commission said the capital is too costly and the states will not be able to meet the requirements. When the market was liberalised, several private players became active. So private players were also willing to lend. In this liberalisation mode, Finance Commission said you can raise money on your own. So the whole nature of the functioning of the economic system both at the level of union and state changed. The result today is that, at one point, we were dependent on union at 98%, but today the dependence on Union is about 2.9%.

J Kant : So according to you, it has completely reversed.

Sibal : Yes, so that 2.9% comes to 12,000 crores. Our total budget is 1 lakh 84 thousand crores. For that 12,000 crores they say, I will not let you borrow, I will not let you float a bond. They are not parents patria in economic terms. They can take as much money to FCI, from NHAI but not include in the fiscal deficit. But if we do, they say we will include.

There are two kinds of expenditure in any budget. One discharged on consolidated funding which is not subject to voting. Then the other subject to voting...

This is how the financial system works. The financial system is symmetrical, not asymmetrical. So that there is no interference.

We also have public accounts- such as provident fund deposits, reserve funds. In other words, we have to pay back that money over a period of time. They say we will count that as borrowing.

Jusitce Kant : Is it your case that there are states which are given favourable treatment?

Sibal : Yes, the State of Uttar Pradesh I have given as example.

Sibal : There is some emergency in the State. We need some breather.

Justice Kant : What is the nature of emergency?

Sibal : We can't pay out of the public funds..

Justice Kant : Salary?

Sibal : Salary we can pay. But not other allowances, pension, Dearness Allowance. Its ultimate impact..its a few months away.  There is a critical Over Draft position. And if we miss two Tuesdays, we can't get any money from the Reserve Bank of India.

Justice Kant : Part of their concern is that many States are indulging in financial indiscipline, in the name of freebies.

Sibal : No. The financial year is over. Where is the question? There is no other State. The whole argument of Macro-Stability, I wish there was macro-stability.  The debt to GDP ratio, which should have been 40%, is 57% for the Union. Then they talk about macro-economic stability. They should be careful about their expenditure and not talk about our.

Sibal hands over a note to the bench.

Justice Kant :  Your note appears to be comprehensive. We will read that.

Don't impose the condition that State should withdraw the suit : SC to Centre

Justice Kant turns to the Union : Learned Attorney, Mr Venkitraman on the last date of the hearing, he ably assisted us, on the previous date, one note was given by Mr. Sibal, giving a brief description of the agreement which formally transpired in February 2024.  In response to that, Mr.Venikaraman( ASG) also gave us a note. which expressly acknowledged this. But then it was subject to two sets of conditions. The set of conditions was in the note itself. And one condition was that demand can be considered only after the disposal or withdrawal of the suit

Justice Kant :  We are saying, for the time being, you can insist for acceptance of the other conditions - those are uniform norms which you apply on pan pan-India basis to all states for which there can be no exception. But what we only want to suggest, you don't insist on the condition of withdrawal or disposal of the suit. Rest of the conditions, we understand your concerns. Other issues are debatable, and interesting also and we will decide.

But as of now, as an ad-hoc, provisional, interim arrangement, and provide sufficient space...to bail out them from the crisis they perceive, all other conditions you are entitled to insist on except the condition of withdrawal of the suit..

ASG :  If we see their prayers, they are seeking the stay of the conditions in the communication which are common to all states.

Justice Kant : Let us see like any litigant. Again in terms of Constitutional scheme. They want to exercise their right to challenge. To what extent they are entitled, to what extent judicial review is possible, what are the prerogatives vested on the Union -the issues raised, these are interesting, and as a constitutional court we would like to examine all these. But as of now, don't put a peremptory condition on them like that. It is virtually a peremptory condition on us also that we should not examine.

Justice KV Viswanathan : Supplementing my brother, would you be able to say this to an individual litigant? You can't say withdraw the suit. It is a constitutional right under Article 131.

Sibal : I am sure the Court will settle these issues. We need to borrow some amount. Let us borrow this amount this year. If we lose the matter, they will cut us the next year. So at least we will tide over the situation. We make the statement, to that extent of the borrowing we make this year, in case they succeed and we lose, they will take it away from us the next year. I am suggesting. Adjust it in the next borrowing ceiling.

Attorney General :  What is presented to the court, these are propositions that underlie certain assumptions that the court's intervention are required. We seriously assail those assumptions. If the Court were to say, before we go further into the matter, we take a little broader view, which means the Court is being called upon to endorse those assumptions at this stage. That is why we said either examine the borrowing issue outside the scope of the court's intervention and deal entirely within the parameters of financial prudence, which is outside the courts. It is not that we wanted to twist somebody's arms that this condition of withdrawal was placed. You can't have it two ways.

Justice Viswananth :  It is a right under Article 131.

AG :  You have to establish prima facie that right is there. Fairness will come if that sole question is answered. Threshold question is begging the question.

Justice Kant :  It is a very preliminary objection, which only the court can answer. What we propose, we can determine the preliminary objection before we proceed to merits. But that itself will take some time.

AG : It is not that Union has picked out something adverse to one particular state. ...

State's projected income 50% less than its projected expenditure : Centre says

ASG : Because your lordships raised one important question of maintainability, please see how this pans out.. please see how it operates. How a fiscal understanding between the State and the Centre operates broadly. Part A comprises of  34,495 crores of tax devolutions, grants and other transfers of the Union. This is one part. Second, borrowings, which require our consent. We have given consent till January 4 to the extent of 34, 230 crores. On the suggestion of this Court, we sat in the North Block and we agreed for another 13, 608 crores. Which becomes 47,838 crores. If you add the 34,000 and 48,000 it comes to 82,000 crores. The revenue estimate of Kerala is only 50% of it. 93,000 crores. It can be even less.  See what can happen if we allow suits like this by states. How it will become judicially unmanageable. See the ramifications...

The press statement of yesterday says their present demand is 55,000 crores. What the projected expenditure for 2023-24 is 2,17,815 crores.

Sibal :  What is the borrowing of the Centre? 8 lakh crores.

ASG : Fiscal deficit of the Union and states apples and oranges...2.5 % is on state allocation. 2.5% is because of states. 3% is railways, defence, foreign affairs. Their breakdown is 83% salaries and pension. They are not comparable. If they say I want consent, if you start going this way, each state can come to Court saying consent is not given by the Centre...

Justice KV Viswanathan : But this is not a bar on the suit.

ASG : When the court sent us on the meeting, we did on absolutely good faith by Union. We gave it flat in two hours meeting, promising 13000 crores.

Justice KV Viswanathan : This is with all the conditions. Today, without prejudice to the other conditions, the condition that you have to withdraw the suit, that part....

AG : Then we will be diluting the circular..

Justice Kant : We are not considering what they are demanding. We are only considering within the permissible parameters, you can consent only to 13,608 crores. That decision is subject to twin conditions. For eg, you are asking them to break even in next three FYs. That appears to be fair prima facie. Then you put another condition, can be imposed...except the second set of conditions, that you withdraw the suit... That is also in a way asking the Court that you don't go into the questions....that is a question we have to decide on the judicial side..

AG :  This is not an ordinary suit. It is an issue of complex national borrowing proportions. For the court to enter, there has to be a first satisfaction. If in the first satisfaction, if there are some doubts...

Justice Kant : That is the reason we required from Sibal at the first stage...when we look at the plain language of Article 293(3), there is an element of discretion vested in you...that "a State may not without the consent of Union"...What is the effect of 'may' etc..these are issues

AG : Article 293 the entire scheme, we may not read literally. These are provisions of the Constitution, where some statements may be completely inappropriate from a political point of view...at this stage, they are virtually telling the Court, that, if I am permitted to use the expression, "whatever mess we have created must be endorsed".

Justice Kant : That is quite an effective argument from your side which requires serious consideration. Fiscal management of states is an issue with which the Union must be concerned.  Because, ultimately, it has its own impact on the nation's economy. You can't see one state in isolation. All these factors have to be examined.

ASG : May I make one suggestion, which can work.  Even on 15th meeting, we have agreed for the numbers. We can issue the same letters. Let the suit be pending. No interim order. If a judicial order is getting generated in these issue, it will have repercussions. We will sort it out.

AG : There are latent political implications how it can be turned into a political machine.

Sibal : The problem is, my learned friends have made arguments which are outside both the constitution and their own policy. Please give me 45 mins.

Justice Kant : Why 45 minutes? We will give you 45 days.

Sibal : This 13,000 crores they are talking about, I am entitled to under their own policy. I don't need their consent for this year. That is in any case I have to get. 

Justice Kant :  First, they will give the formal consent for 13608 crores. It will take care of....

Sibal : Only one week.

Justice Kant : It will take care of your current crisis?

Sibal : No no. Otherwise, I would not be here. I will immediately agree and go out.

AG : Daily borrowing.

Sibal : This is what I am entitled to as per their own policy. I don't need their consent. Under their own letter, which is the impugned order, I am entitled to it.

Justice Viswanathan: If it were so desperate, normal position is take what is offered and then come with an application saying this is what has happened. You are not taking what is offered.

Sibal : I have that application. I am ready to take the amount 13,000 crores. I also need another 15,000 crores at least.

Justice Viswanathan : So you say yes?

Sibal : Yes.

Justice Kant : For the next event, we will again persuade the parties for another round of negotiations.

Sibal : This entitlement I am getting under their own policy...

Justice Kant : We will do one thing. 13608 crores, you yourself will do, we aren't passing any order. As regards additional demand, let a meeting be held, either today or tomorrow. And if you find, some additional amount can be released, subject to whatever conditions permissible as per Constitution except the condition for withdrawal of suit, do it.

AG : They will use the suit as a platform to have the issue incrementally sorted out. They will say this year it happened, next year also it may be done..

Justice Kant : Our endeavour would be, before such a situation arises in A state or B state next Financial Year, we would like to adjudicate this controversy on priority.

AG : I have looked at the global scenario. There is a good enough literature on subnational borrowing. There has to be some kind of regulation. You can't say there should be freewheeling borrowing and I don't look at the national scene.

Justice Kant : Your officers have expertise in the domain. You find out ways and means. 

ASG : In the meeting, we never travelled in law, we travelled in a federal relationship. It was a long-drawn conference. The other partner also has to understand. If they say start giving consent based on our needs, there will be no end to the Constitutional scheme.

Justice Kant : First you proceed on the premise that you have the power to give consent or refuse consent. You also proceed on the premise that when you give consent, it can be conditional. You proceed on the premise that you are the Union, and all States are your integral parts,...

ASG : If every State starts breaching, what will happen to the gross at the national level?

Sibal  : 8 lakh crores over-borrowing by Union, you want to adjust it against us.

ASG : In contrast to G7 nations, we are better in the financial department. Every expert is confirming a far superior position better than G7 nations.

Justice Kant : The entire world is recognising India as a robust economy. No doubt about it. Even when we go outside, this kind of feel is there. It is not a presumption but based on correct facts and figures and on the strong pillars on which the economy is growing and thriving. It is something we are proud of..

Sibal : May I just make one statement, even with the borrowing, I am within the limits of the Fiscal Responsibility Act. There are no crutches. I will demonstrate that.

Justice Kant : Hold a meeting, take this 13608, make out a case for the remaining, except for the condition of withdrawal of the suit. Other conditions are in your interest also. Staets are also under pressure from people.

Sibal : There are no freebies in the case. We want to pay DA.

Sibal : The only request, meeting today, and coming back on Monday, otherwise there will be a problem. Obviously, they are in no mood.

Justice Kant : Because of the suit, dialogue must not stop.

Justice Kant : Mr. Sibal, one advice to your political leaders, when the matter is under consideration before us at your instance and when there is a dialoge between the Union and the States, they should not make any public statements.

Sibal : The problem is public statements come from both sides. I have seen a public statement from somebody very high-up. They should not also.

ASG : We have not made any public statement?

Sibal : Do you want me to name the person?

Sibal : We will cooperate in every possible way.

Justice Kant : There should be an element of trust between two constitutional entities.

Sibal : This is not just about State and Union. It is about the finances of the country which are handled by the Union and States. There are misgivings on both sides and rightly so. Let us come to some kind of solution. We will tide over the crisis and after that let us settle the constitutional issues. If you find that we are not right, take it from the next year. This is what the Finance Commission also said. I just want to read one para from their own letter.

ASG : Last two years, their quota is over on borrowing.

Sibal : Attorney, let us cooperate and tide over the crisis.

Justice Kant : In addition to these conditions which you have already conceptualised, if you feel that in the best interests of the State additional conditions are needed, you can add as deemed appropriate.  Let all the senior officers sit together and resolve this.

Sibal : When can we come back?

Justice Kant : We will grant liberty to make a mention. We are not fixing any date.

AG : Whatever one may say, it may certainly border on a political dimension.

Sibal : Let's not do any politics.

AG : It certainly has political dimensions. If somebody is willing to say, I am inclined to look back and see what I have done,to look at corrective measures and financial prudence, then there is a way forward. If I stick to saying whatever I have done is right, then there is no way out.

ASG : Unless they organise, they say, this is our demand, whether we organise or not, this is our right..

Sibal : That is not correct.

Justice Kant : Our suggestion. One, please don't keep in mind that the suit is pending. Therefore, it will be purely a meeting between the Union and the State.Resolve it on the administrative side, without thinking of the pending suit. Once you forget the suit, you will not impose the condition of withdrawal of suit. 

ASG : Please also tell them, when they come back with a formula, the forumal should be such that they should understand where they are. They can't come and dictate.

Sibal : They want us to make a concession.

AG : Their stand is that unless we go in their direction, there will be a deadlock.

Justice KV Viswanathan : 131 was intended even to facilitate that negotiation.

AG : I look at that broadly. There is a give and take involved.