Centre faces setback as Supreme Court asks for one-time financial package to Kerala as “special case”

The bench, comprising Justices Surya Kant and K V Viswanathan, also observed that the Centre could make up for the one-time package in the coming financial year by introducing stricter conditions for extending financial aid to states.

The union government side diluted its aggressive stand while replying to the oral arguments by senior lawyer Kapil Sibal, who represented Kerala.

According to Venkataraman, the centre was not discriminating against Kerala and took a similar tough stand to facilitate economic discipline in all other states.

Also read: No suit withdrawal pre-condition

Liberal now, be harsh later

However, Justice Kant told the Union government to be “slightly liberal and give a one-time package as a special case” for Kerala. The judge also clarified that the Union government could initiate stringent measures in the subsequent budgets.

“Give Kerala the special package before March 31. But you can subject the state to harsher conditions than in other states. Just a little extra concession for the next ten days. You can adjust it in the first quarter of the next financial year,” the judge said.

According to Venkataramani, the Court should inquire why Kerala could not make ends meet. He clarified that the Centre did not wish to be at odds with the state.

Kerala had petitioned the Supreme Court in its complaint that the limitations enforced by the Union government on borrowing had caused “severe damage to the economy of the smaller state with limited resources”.

It also said the discrimination by the Union government had violated the federal system of governance. The state claimed it was on the verge of going bankrupt due to the unreasonable restrictions imposed by the Centre.

The Union government described Kerala as “one of the most financially unhealthy states”. In a note submitted before the Court, the Attorney General stated that Kerala’s “fiscal edifice has been diagnosed with several cracks”.

According to the Centre, Kerala’s subpar financial metrics indicate a “lack of proper management of its public finances”. The note also highlighted how state-level indebtedness impacted the nation’s credit rating.

However, the Bench reiterated that the package can be given to Kerala by subjecting it to strict conditions.

“You can be slightly liberal and give a one-time package as a special case. And more rigid conditions in future budgets … Before 31 March, give them the special package. But it is subject to harsher conditions than other states. For the existing states, you will be liberal next time (perhaps),” Justice Kant remarked to counsel for the Central government.

The Court conceded that it is not an expert in financial matters, but the governments can work out a middle path for now.
Central and State government officials are likely to hold a meeting on 13 March before the Court considers the matter.

Also read: Centre says open to negotiate with Kerala 

Work out an interim solution

In its suit filed in December last year, the Kerala government alleged that the Centre’s decision to impose certain limits on the state’s borrowings had led to an accumulation of unpaid dues and could result in a grave financial crisis.

The Kerala and Central governments had agreed to hold talks in the previous hearing to iron out issues concerning finance and budgeting after the Supreme Court urged both governments to talk and resolve the issues.
After that, a meeting was held between the centre and the state officials.

During today’s hearing, Sibal sought an immediate release of ₹19,000 crore that the centre owes Kerala.

“The moment the Power Ministry says they have complied, it will be transferred. A bailout package is not possible under this scheme,” the ASG stated.

The Centre said that it cannot give any special treatment to Kerala.

“Theirs is not a special case … We have declined to other states. They do not even budget expenditures. 15 times more bailout sought than expenditure package,” the ASG stressed.

He added that the Union government’s hands are tied in the matter.

“Let them tell the court why they cannot pay … But to find a way out despite constraints, we are not at loggerheads,”  the AG then submitted.

The bench asked the parties to work out an interim solution and proceeded to suggest that a particular concession be given to Kerala by the central government for now.

Such is the crisis that, for the first time in its history, the Kerala government defaulted on the salaries of employees. The state was able to complete the disbursal of February’s salary only by 8 March. And that, too, phase to phase. Normally, the salary gets credited to accounts on the last working day of each month. For over a week, employees struggled, with the state failing to find the required funds to pay the salaries of five lakh employees on payrolls.

Kerala Finance Minister K N Balagopal told South First that he welcomed the court’s decision and hoped the Centre would obey.

“The biggest issue the state is facing is the discrimination by the Union government. If they treat all states equally and release whatever we deserve in time, there would be no crisis at all,” he said.

(With inputs from Bar and Bench)