Why has Kerala approached the Supreme Court seeking directive to Union govt on borrowing limits?

The lawsuit must be seen against a backdrop where Governor Arif Mohammad Khan — an appointee of the Union government — is acting on a petition requesting the President’s intervention to prevent Kerala from experiencing irreversible financial instability as a result of the state government’s alleged reckless borrowing, careless tax management, and unforgivable profligacy.

‘Centre impeding state’s ability to fulfil commitments’

The state government told the Supreme Court on Wednesday, 13 December, that “frequent and unilateral interferences” by the Union government impede the state’s ability to fulfil its promised commitments to the people of Kerala by incorporating them into the yearly budgets and obtaining resources from as many different sources as possible.

It claimed that such interferences violated federal principles.

The state administration has petitioned the Supreme Court three times in the past six months to obtain orders against the Union government regarding financial matters.

While the petitions in the past focused on the Union government’s refusal to allow central funding and assistance in time, the current complaint focuses on the its “deliberate restriction of even the state’s ability to borrow from other parties”.

The complaint filed stated, “It deals with the executive power conferred on the plaintiff state under Article 293 of the Constitution of India to borrow on the security or guarantee of the consolidated fund of the state in alignment with the fiscal autonomy of the plaintiff state as guaranteed and enshrined in the Constitution.”

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Kerala seeks proper guidelines 

Given the possibility that the President and the Union government will adopt the Governor’s suggestion to proclaim a state of emergency, political commentators view the new lawsuit as a counter-strategy.

In the lawsuit, the LDF government has requested that the apex court provide proper guidelines or orders to the Union government to accept its right to gather the necessary resources to draft a pro-people budget within the next two months.

The state administration alleged that letters in March by the Union of India through the Ministry of Finance and the changes made in Section 4 of the Fiscal Responsibility and Budget Management (FRBM) Act had facilitated meddling in the state’s financial affairs.

The Supreme Court’s winter break begins on Saturday, 16 December, and the court reopens on 2 January the following year. Based on information from sources in the Supreme Court registry and attorneys involved in the case, the matter is expected to be heard only in January.

Kerala FM reacts

Speaking with South First, Kerala Finance Minister KN Balagopal stated that the state administration is asking the Supreme Court for assistance in lifting all the unnecessary borrowing restrictions the Union government has put in place.

He claimed that the state was compelled to file the petition because the Union government had reduced the state’s borrowing cap, which may cause a serious financial catastrophe in the coming months.

Balagopal stated, “The BJP government’s imposition of a borrowing ceiling at the state level violates fiscal federalism principles.”

According to him, the suit was brought under Article 131 of the Constitution, which grants the apex court the initial authority to resolve conflicts between the Union government and state governments.

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‘Fundamental goal to achieve fiscal consolidation’

According to the petition, the Kerala Fiscal Responsibility Act, 2003, governs the borrowing caps and the amount of such borrowings in the state. The state government is given precise goals under this Act to help it reduce its budget imbalances.

The state has notified the apex court that the fundamental goal of this state legislation is to achieve fiscal consolidation, which includes lowering fiscal deficits and managing public debt to preserve macroeconomic stability and sustainable economic growth.

The state argues that it can borrow on the security or guarantee of the state’s consolidated fund since Article 293 of the Indian Constitution grants the state budgetary autonomy.

The Kerala government has maintained that it is entitled to control its financial affairs, including creating and administering its borrowings and the state budget.

According to the petition, the Indian Constitution grants economic autonomy to states to manage their budgets under several provisions. However, the Union government has recently limited this authority with several orders and changes to the Economic Responsibility and Budget Management Act 2003.

The state has objected to the changes made to Section 4 of the FRBM Act, 2003, by the Finance Act, 2018, as well as the letters issued by the Ministry of Finance (Public Finance-State Division), Department of Expenditure, Government of India, on 27 March, 2023, and 11 August, 2023.

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‘Move would further reduce Net Borrowing Ceiling’

The claim is that these letters and amendments interfere with the state’s finances by imposing a Union-determined net borrowing ceiling on the state, which limits borrowings from all sources, including open market borrowings.

The petition said that such moves would further reduce the Net Borrowing Ceiling (NBC) by including aspects of the state’s “borrowing” that would not otherwise be considered “borrowings” as contemplated under Article 293 of the Constitution.

Additionally, it argued that restricting the use of Article 293(3), read with Article 293(4), as a means of exercising authority, restricts the state’s exclusive constitutional powers. According to the state’s lawsuit, the state urgently needs to obtain almost ₹26,000 crore to stop the looming financial catastrophe.

“Only the states have the authority to decide how much money the state will borrow to cover the fiscal deficit and balance the budget. The state would only be able to finish its state plans for the specific financial year if it could borrow the amount necessary within its budget. Thus, the plea claims that it is imperative that the state be allowed to exercise its constitutional rights and that its borrowings be unhindered in any way for the advancement, prosperity, and growth of the state and its citizens,” the petition said.

The state government argues in its plea that the Union government is meddling with the state’s finances by imposing a net borrowing ceiling and by further lowering it by incorporating elements into the state’s “borrowing” that would not otherwise be considered “borrowings” under Article 293 of the Constitution.

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Court proceedings

Through the contested amendments, the defendant (the Union government) has intruded upon the plaintiff state’s legislative territory because, according to Article 246 of the Constitution, “public debt of the state” is a solely state list item included in the Seventh Schedule.

“The plaintiff state’s authority could be impeded by the impugned amendments, which are ultra vires the Constitution,” it said.

The plea claims that the plaintiff state has a legitimate fear that the defendant may use the contested amendments to justify and legalise the defendant’s executive acts in issuing the contested orders, which go against the provisions of the Constitution.

The state has told the court that it cannot perform its obligations under the annual budgets because of these financial constraints. The state government has stated that the financial burden brought on by the Centre’s imposition of a borrowing ceiling has resulted in enormous arrears in social programmes, payments owed to different recipient groups, state government employees, state government pensioners, and state-owned enterprises.

According to the state government, the net negative impact or loss incurred by the state’s economy over the following five years might reach ₹2-3 lakh crore.

“With its limited resources, the plaintiff (Kerala) state will not be able to recover from this for decades if the damage is not prevented,” the state pleads.

Senior advocate Kapil Sibal is representing the state in the case along with state’s counsel CK Sasi.