Sit Together And Resolve Issues: Says Apex Court As Kerala Argues That Union Cannot Control State's Budget Which Is Tailor Made Based On Ideology Of Political Party In Power

Amidst the ongoing Centre-State tussle between Kerala and the Centre, Senior Advocate Kapil Sibal, appearing for the State of Kerala before the Supreme Court today, argued, "The Union cannot control our budget, because our budget is tailor made to the budget of our people, depending on who is in power, what kind of ideology that political party possesses."

The Bench of Justice Surya Kant and Justice K.V. Vishwanathan was hearing Kerala's Suit alleging Centre's interference in exercise of its exclusive, autonomous and plenary powers to regulate its own finances by putting a ceiling on net borrowing.

At the outset, Sibal said, "I stand here with a heavy heart, because matters of such nature should actually be resolved in the spirit of federalism and co-operative federalism, but given the situation that the state is in, we have no choice but to agitate this matter."

Sibal contended, "I just want to disabuse your lordships of any intent on our part to seek some allocations from the Union, that is not our intent. I do not want your lordhships to decide to what amount of money should be given to me.....There are certain constitutional principals involved, that need to be settled and at the moment we are only at the interim relief."

"We are living in a country where financial landscape of the country is as diverse as its political landscape and cultural landscape," the Senior Advocate added.

On being asked by the Court whether in the past there had been any suit like this by any State, Sibal replied, "This is the first of its kind. A very unique..."

"..The State of Kerala, high density of population, no possibility of manufacturing, and the only source of income is tourism and IT, therefore, you need to get the people educated....so the point that I am making is that the nature of economy of each state and therefore the budget considerations in each state are entirely different from any other state. It is influenced by the local factors, the local needs," Sibal submitted.

"In the Constitution of India, the powers and responsibilities of the Union as well as the States are symmetrical. There is no asymmetry," he argued.

"The allocations in terms of what all States will get is decided by the recommendation of the Finance Commission. If you take the cumulative of the taxes, they will decide how much tax will go to the State and how much will come to the Centre. They decide that, and that is being followed... We (State of Kerala), like any other State or Union, decide our own budget", he added.

The Senior Advocate also contended, that in the absence of deficit financing, there can be no progress.

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

The AG contended, "What is presented to the Court, these are propositions with underlying assumptions that the court's intervention is required. We seriously assail those assumptions. The court is being called upon to endorse those assumptions at this stage. That is why we said to examine the issue within the parameters of financial prudence, which is outside the courts. You can't have it two ways."

"Because of this suit, the dialogue must not stop, it must continue, that is the strength of the Union and the State...It's (the Suit) is at a stage of, some element of trust between two constitutional entities...", Justice Kant remarked orally.

To this, Sibal added, "This is not just about State and Union, its about finances of the country, how they are handled, they are handled partly by the Union and partly by the States...the idea is to let's come to some kind of solution and get the constitutional issue resolved."

The Bench 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 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."

Accordingly, the Court adjourned the matter with liberty to the parties to approach the Court after meeting to resolve differences.

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.

The centre while highlighting that the State is one of the most financially unhealthy States in the country, said, "Kerala has been one of the most financially unhealthy States and its fiscal edifice has been diagnosed with several cracks… Squeezed for funds for capital expenditure and to circumvent borrowing limits imposed by its own FRBM Act and similar limits prescribed by the Central Government, Kerala has resorted to substantial off-budget borrowing through the Kerala Infrastructure Investment Fund Board (KIIFB) ...”.

The 12th Finance Commission classified Kerala among the States with deteriorating debt situation reflected both in terms of the Debt-GSDP ration and the ration of interest payments to revenue receipts. As per the Commission, Kerala had one of the lowest percent of capital expenditure at 1.1.%. The 14th Commission had noted that there were only three States with revenue deficits in 2007-08 namely, Kerala, Punjab and West Bengal. The 15th Finance Commission designated Kerala to be a “highly debt stressed” State.

As per the note, a study published in the September 11, 2021 issue of the Economic and Political Weekly titled “Utilisation of Government Borrowings in major Indian States” has also noted that Kerala has shown poor and unproductive utilisation of its debt receipts.

Cause Title: State of Kerala v. Union of India