"Won't take us anywhere": Kerala declines Centre’s Rs 5,000 crore package

The Union government on Wednesday, 13 March, stated in the Supreme Court that it would provide Rs 5,000 crore to Kerala before 31 March as a one-time package to help the state tide over its financial crisis. However, the state has refused the offer and demanded at least Rs 10,000 crore.

The case will next be heard on 21 March.

Additional Solicitor General N. Venkataraman informed the bench of justices Surya Kant and K.V. Viswanathan that the union government would allow the state Rs 5,000 crore. This sum would be deducted from its net borrowing ceiling for the first nine months, per the Centre's offer, but it would be "subject to certain conditions".

The bench had on Tuesday, 12 March, urged the union government to consider providing the state a one-time package to bail it out from its current financial crisis. The top court made this recommendation while hearing a plea by the state that the union government was unduly interfering with the state’s power to borrow and regulate its finances.

The Centre then agreed to offer the state Rs 5,000 crore right away as an interim measure.

Appearing for Kerala, senior advocate Kapil Sibal rejected the Centre's offer. “Rs 5,000 crores will not take us anywhere; we need at least Rs 10,000 crores. They are saying this on the assumption that the suit is liable to be dismissed,” said Sibal, adding that the concession was also based on an assumption that the state was not entitled to additional borrowing.

Sibal went on to underscore that, based on the recommendations of the Finance Commission, the state was entitled to this money. However, by stating that they were giving a 'concession', the union government was trying to impose conditions that would affect the state's control over its expenditure—the topic of the original matter. “This would violate the principles of federalism,” added Sibal.

He requested the bench to hear the matter in full, as he would prove that the state was entitled to borrow this amount under law.

He also pointed out that the state should indeed get interim relief, but the prima facie case and the balance of convenience were both in its favour as well. He highlighted in this context that irreparable injury would be caused to the state if additional borrowing was not allowed.

The bench posted the case for further hearing of the interim relief plea on 21 March.

During today's hearing (13 March), the bench suggested that the state should accept the Rs 5,000 crore. However, Sibal rejected it on behalf of the Kerala government, stating that the amount came with stringent conditions that could lead to the union government controlling the state’s budget. “This will trap us. We'll not be able to pay people. And then they say they will control our expenditure. It's against federal principles,” argued Sibal.

ASG Venkataraman had stated that based on the suggestion from the court and as a very special and exceptional measure—which was not to be used or cited as a precedent by any other state or on any other occasion—the union government was ready to give its consent for Kerala borrowing Rs 5,000 crore.

However, this would be subject to certain conditions:

1. This amount will be deducted from Kerala's net borrowing ceiling for the first nine months of FY 2024–25.

2. Consent for borrowing in the year 2024–25 will only be given on receipt of the prescribed information and documents from the state government.

3. Consent for borrowing will be given to Kerala in the first nine months of 2024–25 on a quarterly basis and for up to 25 per cent only of the eligibility amount arrived at after deducting the early special concession of Rs 5,000 crore.

4. The Government of Kerala would have to submit the 'Plan B' it has announced in its budget for 2024–25 to raise resources and improve the state's financial position and would need to put the plan into action before borrowing consent was granted for the last quarter of 2024–25.

The ASG added that consent to borrow Rs 15,000 crore, as requested by the state government, could propel the state into a further financial crisis.

Last week, the Centre had refused Kerala's request to allow borrowing of Rs 19,351 crore, citing concerns over the state's budget deficit.

Kerala's original suit against the Union under Article 131 of the Constitution challenges the government’s norms on borrowing limits, highlighting the state's unique financial landscape.

While defending its spending pattern, the state emphasised its investments in critical sectors such as health and education, which contribute to improving its human development indices.

In its petition filed in December 2023, the Kerala government alleged that the union government’s decision to impose limits on the state's borrowings had led to an accumulation of unpaid dues and would result in a grave financial crisis. Subsequently, the state had failed to pay salaries to many of its employees for the month of February.

In a note filed in court, the union government claimed that it had to restrict Kerala’s borrowing limit to safeguard macroeconomic stability. Attorney General R. Venkataramani argued the potential ramifications of unchecked borrowing by a state on the nation's credit rating and overall financial stability. The Union's stance rested on the premise that broader economic concerns necessitate centralised oversight to prevent fiscal imprudence by the state.

Kerala has rejected this, stating that the Constitution granted states autonomous authority over their public debts. The state has challenged the Union's interpretation of Article 293, stating that the consent outlined in the Constitution is to protect the Union's position as a creditor and does not give it overarching powers to regulate a state’s borrowing.

The state's plea seeks the lifting of borrowing restrictions, asserting that such central interference compromises the nation's federal integrity. Kerala, which spearheaded the legal challenge against the Centre's borrowing limits, claims this has led to retaliatory measures, including the threat of withholding necessary funds unless the case is dropped.

Under the Act, Kerala can borrow Rs 11,731 crore within the borrowing limit. The present petition, however, has nothing to do with this loan amount.

The demand in this petition is for immediate permission to take a loan of Rs 24,000 crore. However, this was denied citing the earlier petition.