Is Fiscal Decentralization An Aspect Of Indian Federalism? Read 9 Questions Referred To SC Constitution Bench In State Of Kerala vs UoI

The Court denied the grant of interim relief to the State of Kerala in its challenge against borrowing limits set by the Central Government holding that the State had failed to establish a balance of convenience and irreparable injury.

Justice Surya Kant and Justice K.V. Vishwanathan observed, “Since Article 293 of the Constitution has not been so far the subject to any authoritative interpretation by this Court, in our considered opinion, the aforesaid questions squarely fall within the ambit of Article 145(3) of the Constitution. We, therefore, deem it appropriate to refer these questions for pronouncement by a Bench comprising five judges.”

Sr. Advocate Kapil Sibal and AG K. Gopalakrishna Kurup represented the plaintiff, while Attorney General for India R Venkatramani and ASG N Venkatraman appeared for the defendant.

The Centre had imposed a Net Borrowing Ceiling to restrict the maximum possible borrowing of the State. This ceiling covered all sources of borrowings, including open market borrowings, loans from Financial Institutions, and the liabilities arising out of the Public Account of the Plaintiff.

The State filed the suit under Article 131 of the Constitution to challenge the impugned actions of the Union, arguing that they exceeded their power under Article 293 of the Constitution regarding State borrowing. The State further sought to restore the position before the Centre imposed a ceiling on all the State borrowings and to enable the State to borrow INR 26,226 crores immediately.

In its analysis, the Supreme Court found that the State had not established a prima facie case for the interim relief sought. The Court noted discrepancies in the State’s claims regarding under-utilized borrowing space and over-borrowings from previous years. The Bench also highlighted the potential adverse effects on the economic well-being if the interim relief were to be granted.

The Supreme Court framed the following substantial questions of law for interpretation before the Constitution Bench:

• What is the true import and interpretation of the following expression contained in Article 131 of the Constitution: “if and in so far as the dispute involves any question (whether of law or fact) on which the existence or extent of a legal right depends”?
• Does Article 293 of the Constitution vest a State with an enforceable right to raise borrowing from the Union government and/or other sources? If yes, to what extent such right can be regulated by the Union government?
• Can the borrowing by State-Owned Enterprises and liabilities arising out of the Public Account be included under the purview of Article 293(3) of the Constitution?
• What is the scope and extent of Judicial Review exercisable by this Court with respect to a fiscal policy, which is purportedly in conflict with the object and spirit of Article 293 of the Constitution?

As a necessary corollary to the questions above, the Court framed more questions of significant importance impacting the “Federal Structure of Governance” for consideration:

• Is fiscal decentralization an aspect of Indian Federalism? If yes, do the Impugned Actions taken by the Defendant purportedly to maintain the fiscal health of the country violate such Principles of Federalism?
• Are the Impugned Actions violative of Article 14 of the Constitution on the ground of ‘manifest arbitrariness’ or on the basis of differential treatment meted out to the Plaintiff vis-à-vis other States?
• What has been the past practice regarding regulation of the Plaintiff’s borrowing by the Defendant? If such practice has been restrictive of Plaintiff’s borrowings, can it estop the Plaintiff from bringing the present suit? Conversely, if such practice has not been restrictive, can it serve as the basis for the Plaintiff’s legitimate expectations against the Defendant - Union of India?
• Are the restrictions imposed by the Impugned Actions in conflict with the role assigned to the Reserve Bank of India as the public debt manager of the Plaintiff?
• Is it mandatory to have prior consultation with States for giving effect to the recommendations of Finance Commission?

Accordingly, the Supreme Court directed the Registry to place the matter before the Chief Justice of India for the constitution of an appropriate Bench.

Cause Title: State of Kerala v. Union of India (Neutral Citation: 2024 INSC 253)

Appearance:

Plaintiff: Sr. Advocate Kapil Sibal; AG K. Gopalakrishna Kurup; AOR C. K. Sasi; Advocates Meena K Poulose, Anusha Nagarajan, Aparajita Jamwal, Manisha Singh, Rishabh Parikh, Sumedha Sarkar and Rupali Samuel

Defendant: Attorney General R Venkatramani; ASG N Venkatraman; AOR Raj Bahadur Yadav; Advocates Sonali Jain, Chitvan Singhal, Raman Yadav, Kartikay Aggarwal, Abhishek Kumar Pandey, Ameyvikrama Thanvi and Mukesh Kumar Singh

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