Supreme Court Reserves Order In Kerala's Plea For Interim Relief In Its Suit Challenging Borrowing Limit Imposed By Centre

The Supreme Court has reserved order in Kerala's application for interim order in its Suit alleging the Centre's interference in the exercise of its exclusive, autonomous, and plenary powers to regulate its own finances by putting a ceiling on net borrowing.

The Bench of Justice Surya Kant and Justice K.V. Vishwanathan said, "We'll revert back at the earliest..Order reserved." 

During the hearing yesterday and today, Senior Advocate Kapil Sibal, appearing for the State of Kerala had started by explaining the present mechanism for the allocation of funds to States and the role of the Central Government. He had told the Court that the Finance Commission is the expert body whose decision should be followed by the Centre. 

He had also told the Bench that the extra boring sought to be done by Kerala is within its deficit. Sibal contended that presently around 98% of its expenses are from funds generated or borrowed by it and that only the rest is given by the Centre, whereas earlier the Centre would give 98% of the funds needed by the State. The Senior Counsel had submitted that the macro economic picture is taken into account by the Finance Commission. He had contended that around 63% of the revenue collected by the State goes to the Centre. "They have more money, we have more expenditure to make. There is no way development could take place unless we borrow", he submitted. 

Sibal had submitted that there is no land in Kerala that is available, and hence there cannot be much manufacturing. He submitted that even for the acquisition of  land for the National Highways, the State shares the expense due to high land cost. He had also submitted that the State can borrow within the Fiscal Deficit and that the unutilized part can be carried forward for the five year award period. He had submitted that as long as the State borrows within the Fiscal Deficit, the macro economy of the country will not be affected. 

The Senior Counsel had argued that the executive power of the Union cannot be used to disentitle the state from borrowing from the market and that there is no such power under the Constitution. He further submitted that the Centre is preventing the State from even approaching the market for borrowing and that the market will decide on whether to lend to the state taking into account all factors.    

Court had asked Sibal whether the State ever approached the Finance Commission stating that the Centre has transgressed its guidelines. Sibal had responded by saying that the Centre has just done it now.

Sibal had submitted that the Centre has overborrowed by Rs. 8 Lakh crores and that it has done so because it believes that it will be able to manage its finances. He had said that the same should apply to the state as well. 

 Attorney General (AG) R Venkataramani and Additional Solicitor General (ASG) N Venkataraman appeared for the Union of India.

ASG Venkataraman argued that inaccurate statements have been made by the state. Pointing to statistical data, the ASG asserted that Kerala has been borrowing excessively in recent times. Emphasizing the importance of financial considerations, he urged the Court to take into account the State's fiscal parameters when considering interim relief. 

The AG submitted, "Their own act says that they will govern their own fiscal discipline. Now to go beyond that and say that they will look at instances or look at aspects which related to Union financing, Union borrowing, i think is completely besides the point." He also contended that there was no breach of the Finance Commission's recommendations. 

During a previous hearing, Senior Advocate Kapil Sibal had argued on behalf of Kerala that the State has no possibility of manufacturing and that the only source of income for the State is Tourism and Information Technology.

Earlier, the Bench had suggested, "Sit together and resolve it.....Let all the senior officers who are capable to take the decision and who are already involved in the decision, all to sit together. We grant liberty to mention the matter."

Justice Kant had clarified, "Our suggestions are only twofold: One, please don't keep in your mind that there is a suit pending, don't go by this kind of hiccup that there is a suit pending and therefore, whatever you deliberate is in reference to suit. So, therefore, it will be a meeting purely between the Union and the State. Resolve it on administrative side don't think of the pending suit. Two: If at all the question of suit comes, because if you once forget there is a suit then you'll (Union) not impose the condition of withdrawal (Suit) also."

Pertinently, in February this year, a detailed note was filed by Attorney General (AG) R. Venkatramini before the Court, highlighting the poor public finance management by the State despite several financial grants by the Centre.Several reports and studies were cited and referred to argue that the State government's demand for more funds from the Centre will not resolve its problem as Kerala is a "highly debt stressed" State.

The note was filed as a response to a Suit filed by the State in 2023, alleging that the Central government was interfering with its power to borrow and regulate its own finances. As per the State, the action to regulate its powers would lead to a grave financial crisis.

Cause Title: State of Kerala v. Union of India [ORGNL.SUIT No. 1/2024]