SC rejects Kerala plea for directing Centre to relax borrowing cap restrictions

The court held the larger issues involve the interpretation of a raft of constitutional issues that can only be adjudicated by a Constitution bench of at least five judges

The Supreme Court on Monday rejected the Kerala government’s plea for directing the Union government to relax its borrowing cap restrictions so that the southern state may borrow additional funds during the current fiscal year.

The court on March 22 reserved its verdict in the case. (HT PHOTO)

A bench of justices Surya Kant and KV Viswanathan refused to put on hold the operation of two letters issued by the Union finance ministry last year and certain amendments made to the Fiscal Responsibility and Budget Management Act in 2018 that imposed borrowing cap restrictions on states.

Deciding an interim plea in the case that represents a critical examination of federal financial relations and the autonomy of state governments within India’s complex fiscal framework, the court held the larger issues involve the interpretation of a raft of constitutional issues that can only be adjudicated by a Constitution bench of at least five judges.

While referring the larger issues to a Constitution bench to be formed by the Chief Justice of India, the court said that the Kerala government has already been offered “substantial” relief in terms of additional borrowing allowed by the Centre earlier. It added, therefore, that there exists no ground to order the Centre to relax the borrowing norms for the state any further.

The court noted that the Centre has allowed an additional borrowing of ₹13,608 crore, subject to certain stipulations, which can take the state out of the financial crisis to some extent. It agreed with the Centre’s arguments that once a state overborrows, there can be a reduction in the next payouts.

The issues referred to the Constitution bench include issues relating to the interpretation of Articles 292 and 293, pertaining to the borrowing powers of the Union and states respectively, and the scope of judicial review in the matters of financial policy.

The bench on March 22 reserved its verdict in the case involving financial disagreements between the state of Kerala and the Union government over borrowing limits after the two sides failed to reach an agreement despite extensive discussions. On that day, the court remarked that it would also delve into the pertinent points of law as to whether the issue of fiscal borrowing is within the parameters of justiciability or not.

The conflict, brought before the court by Kerala under Article 131 of the Constitution, challenges the Centre’s prescribed borrowing limits, underscoring the southern state’s distinct fiscal challenges. Article 131 deals with the original jurisdiction of the apex court in any dispute between the Centre and states.

The state’s initial plea was for permission to borrow ₹19,351 crore, to which the Centre consented but only up to ₹13,608 crore, with a stipulation for Kerala to retract its legal challenge. The Supreme Court, however, said that such a condition was unacceptable, prompting Kerala to reject the Centre’s subsequent offer of a ₹5,000 crore one-off payment due to attached stipulations.

On March 13, the Kerala government decided to rather challenge the Centre’s borrowing cap restrictions, rejecting the Centre’s proposal that the state might borrow an extra ₹5,000 crore as a “one-time exception” in the current fiscal year.

Kerala stood firm on a demand for at least ₹10,000 crore, citing this figure as the bare minimum necessary to fulfil critical financial responsibilities, including disbursements to public funds, pensions, and salary revisions.

Kapil Sibal, representing Kerala, argued that the Centre’s borrowing cap represents an undue overreach into the state’s prerogative to manage its finances, particularly in light of reduced borrowings from the Centre since economic liberalisation.

Counterarguments from additional solicitor-general N Venkataraman accused Kerala of financial mismanagement and excessive borrowing over recent years, potentially jeopardising the state’s macroeconomic health and the broader national interest. He opposed Kerala’s request for additional funds, suggesting that any fiscal strain was self-inflicted and highlighted the substantial support extended to Kerala by the Union, including GST compensation payments.

Kerala’s Pinarayi Vijayan government challenged two letters issued by the Union finance ministry last year and certain amendments made to the Fiscal Responsibility and Budget Management Act in 2018 for “imposing a net borrowing ceiling (NBC) on the state by limiting borrowings from all sources, including open market borrowings.”

The Centre has argued that the financial edifice of the state has several cracks. It gave statistics to show the revenue deficit in Kerala as a percentage of gross state domestic product (GSDP) was 3.17% for 2021-22, higher than the all-states average of 0.46%. The fiscal deficit rate for Kerala was 4.94% compared to an all-state average of 2.80%.

The suit filed by Kerala also raised a fundamental issue of fiscal federalism. “The orders and amendment create unconstitutional limits and impediments on the state to borrow and regulate its own finances, therefore violating the provisions and principles of fiscal federalism under the Constitution,” it argued.

Over the previous hearings, the court advised the Kerala government to exercise prudence in fiscal matters while imploring the Centre to relax its norms to enable the state to tide over the current crisis. On March 6, the bench suggested that the state should accept the Centre’s proposal to borrow an additional ₹13,608 crore for the time being, subject to meeting certain stipulations. At the same time, it added that the Centre should not put the withdrawal of the suit by Kerala as a precondition for allowing additional borrowing.

But the bench subsequently head the case on merits after the Centre and the state were unable to agree after much deliberation.