SC seeks Centre’s response on Kerala’s suit against state’s borrowing capacity

The suit challenged two letters issued by the Union finance ministry (public finance-state division) on March 27 and August 11 last year and amendments made to Section 4 of the Fiscal Responsibility and Budget Management Act, 2003 in March 2018 for imposing a net borrowing ceiling

The Supreme Court on Friday sought the Centre’s response to a suit filed by the Kerala government in December last year against the Union government for imposing limits on the state’s borrowing capacity.

(Representative Photo)

The state had challenged a March 2023 order of the Union finance ministry reducing the state’s borrowing limit stating that the Centre has lowered the borrowing limit of the state, which can potentially lead to a grave financial crisis.

A bench of justices Surya Kant and KV Viswanathan issued notice on the suit to the Centre through the office of the attorney general and agreed to examine the interim application of the state government which said, “As of October 31, 2023, a sum of Rs.26,226 crore is imminently and urgently required to avert the impending grave financial crisis” caused by the Union’s orders.

The Court further posted the for January 25 to consider the state’s urgent requirement for a sum of Rs.26,226 crore to meet its welfare obligations including pension and dearness allowance.

Senior advocate Kapil Sibal appearing along with advocate CK Sasi for the Kerala government said, “Ultimately, this matter has to go to a constitution bench.”

The suit challenged two letters issued by the Union finance ministry (public finance-state division) on March 27 and August 11 last year and amendments made to Section 4 of the Fiscal Responsibility and Budget Management Act, 2003 in March 2018 for “imposing a net borrowing ceiling (NBC)” on the state by limiting borrowings from all sources, including open market borrowings. It further reduced the NBC by including some aspects under “borrowing” which are not contemplated under the Constitutional scheme.

“Despite the exclusivity of the power of the state, and the framework already laid down through the exercise of such power, 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,” the state in its suit said.

Prior to these changes, the borrowing limits were regulated under the Kerala Fiscal Responsibility Act, 2003. The state said, “The defendant (Centre) has encroached into the legislative domain of the plaintiff 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 actions of the defendant fall foul of and violate the federal structure of the Constitution.”

It added, “The present suit squarely raises a dispute as to the right, power and authority of the Union government to interfere with the exclusive, autonomous and plenary powers of the state to regulate its own finances under several provisions of the Constitution.”

As a consequence of the orders passed by the Centre, the state submitted that it was not able to fulfil the commitments in its annual budgets, resulting in huge arrears by way of welfare schemes to the people of the state particularly the poor and the vulnerable, various beneficiary groups, the employees of the state government, its pensioners and dues to its state-owned enterprises.

In a detailed break-up of the funds immediately required by the state, the application filed along with the suit pointed out that the chunk of dues of nearly Rs.8,000 crore is towards dearness allowance dues for state employees, pay revision arrears of Rs.4,000 crore, and pension dues of Rs.2,790 crore among other heads of outstanding payments.

“The state is legitimately apprehensive that its treasury operations will be halted or starkly curtailed,” the suit said, pointing out that the state has suffered a cumulative expenditure loss or resource deficiency of over Rs.1.07 lakh crore during 2016- 2023 on account of the amendment introduced by Centre.

“This is a dire situation looming ahead, the immediate consequences to the state will be catastrophic...If the damage is not prevented, the state, with its meagre resources, will not be able to recover from this for decades,” the state added.