Kerala va Union govt: Borrowing limit case sent to Constitution bench

The Supreme Court on Monday, 1 April, has referred to a five-judge bench Constitution Bench the case filed by Kerala against the union government for imposing limits on the state’s borrowing capacity.

The bench comprising justices Surya Kant and K.V. Viswanathan refused the interim relief sought by Kerala for additional borrowing for FY 2023–24. It highlighted that the state had already received substantial relief for the financial year from the Union after the court had intervened in the matter and that the balance of convenience was now in favour of the union government.

The Court said that it had applied the triple test of prima facie case, balance of convenience and irreparable injury. Having done so, the court was inclined to accept the argument of the union government that if there is any over-utilisation of the borrowing limits by a state in a financial year, there can be corresponding deductions in the subsequent years.

However, the judges also observed that the case filed by the state raises issues related to interpretation of the Constitution and referred the matter to the five-judge Constitution bench in accordance with Article 145(3).

It was pointed out that the case raised issues related to the interpretation of Articles 131 and 293 of the Constitution and it was also at issue whether Article 293 allows an enforceable right for the states to borrow from the government and other sources, and if yes, to what extent it can be regulated by the Union. The question of whether borrowing by state-owned enterprises and liabilities arising from public accounts should be included in the purview of Article 293(3) of the Constitution and the scope of judicial review of fiscal policy are other concerns that need to be addressed.

As Article 293 had never been subjected to such scrutiny, the bench thought the matter should be sent to the five-judge Constitution bench.

Also, in a meeting held on 8 March, the Union consented to give Rs 5,000 crore to the state. On 19 March, the Union consented to a further Rs 8,742 crore and Rs 4,866 crore, which comes to a sum total of Rs 13,608 crore. The court underscored that it had disapproved of the Union's condition that the state should withdraw the suit for approval for additional borrowing of Rs 13,608 crore.

In February, the Centre had refused Kerala's request to allow the state to borrow 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 rests 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 has spearheaded the legal challenge against the Centre's borrowing limits, claims the Union's stance has led to retaliatory measures, including the threat of withholding necessary funds unless the case is dropped.

Under the Fiscal Responsibility Act, 2003, 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.