Supreme Court Refers Kerala's Suit Against Union Over Borrowing Limits To Constitution Bench, Refuses Interim Relief

The Supreme Court on Monday (April 1) 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.

At the same time, however, the bench, comprising Justices Surya Kant and KV Viswanathan, refused to pass orders on the interim relief sought by the State for additional borrowing for the financial year 2023-24.

It was observed that the State received substantial relief for the financial year from the Union following Court intervention. Applying the triple test, the Bench opined that the prima facie case and balance of convenience were in favor of the Union Government.

Leading the court to refer the matter to a Constitution Bench was an observation that the suit involved issues regarding interpretation of Articles 131 and 293 of the Constitution, as well as whether Article 293 vests an enforceable right on States to borrow from government and other sources (if yes, to what extent it can be regulated by the Union?).

Whether the borrowing by state-owned enterprises and liabilities arising from public accounts should be included under the purview of Article 293(3) of the Constitution and the scope of judicial review regarding fiscal policy were stated to be other issues arising in the matter.

Considering also that Article 293 of the Constitution has not been subjected to any authoritative pronouncement by the top Court so far, the bench thought it fit to refer the matter to a 5-judge bench.

On interim relief

In deciding the application for interim relief, the Court applied the triple tests of (i) prima facie case, (ii) balance of convenience and (iii) irreparable injury.

Prima facie, it was inclined to accept the argument of the Union that if there is any overutilization of the borrowing limits by a State in a financial year, there can be a corresponding reduction in the subsequent years.

So far as the aspect of balance of convenience, it was observed that the same lay with the Union Government as substantial relief had been given to the State following Court intervention. 

Recapitulating earlier hearings and negotiations between the parties, the Court noted that it had disapproved of a condition imposed by the Union that the State should withdraw the suit for getting consent for additional borrowing of Rs 13,608 crores. Moreover, in a meeting held on March 8, the Union had offered consent for Rs 5000 crores. Thereafter, on 19 March, the Union had afforded consent for Rs. 8742 crores and Rs 4866 crores, which came to a sum total of Rs. 13,608 crores.

In this backdrop, it was concluded that the State had secured substantial relief for the financial year 2023-24.

"..we are unable to accept the argument of the Plaintiff at the interim stage that there is fiscal space of unutilized borrowing of either INR 10,722 crores as was orally prayed during the hearing or INR 24,434 Crores which was the borrowing claimed in the negotiations with the Union," the Court observed in the order.

Developments leading upto present order

In the instant case, the Court had been trying to find a solution to Kerala's urgent financial needs before the end of the financial year ending on March 31, 2024. 

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 could only cover a fraction of Kerala's immediate financial requirements.

As such, despite Court's recommendation to resolve the dispute through negotiations, the state and union governments remained at an impasse. The same gave rise to the need for the Court to decide the question of interim relief by way of the present order, which was reserved on March 22. For a detailed report on contentions raised with respect to interim relief, click here.

Background

The genesis of this dispute dates back to December, when 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 fulfil 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

Citation : 2024 LiveLaw (SC) 269

Click here to read the order