There can be substantial reduction of borrowings on over-utilisation of limits: Supreme Court on Kerala-Centre matter

New Delhi: The Supreme Court on Monday accepted the Union government's contention that when there is over utilisation of borrowing limits by the state government, there can be substantial reduction of it in subsequent year.

A bench of Justices Surya Kant and K V Vishwanathan declined any ad interim relief to Kerala in an original suit filed under Article 131 of the Constitution as the Centre had made additional provisions to the sum of Rs 13,608 Cr for it.

"We are of the view that since Kerala has failed to establish the three prongs of proving prima facie case, balance of convenience and irreparable injury, it is not entitled to the interim injunction," the bench said.

The court also said it seemed that the mischief that is likely to ensue in the event of granting the interim relief, will be far greater than rejecting it.

"If we grant the interim injunction and the suit is eventually dismissed, turning back the adverse effects on the entire nation at such a large scale would be nearly impossible," it said.

The court referred the suit to the Chief Justice of India for placing it before the appropriate Constitution bench of five-judge for adjudication.

The bench said even if it is assumed that the financial hardship of Kerala is partly a result of the Centre’s regulations, the concern has been assuaged to some extent so as to bail it out the from the current crisis.

"If the State has essentially created financial hardship because of its own financial mismanagement, such hardship cannot be held to be an irreparable injury that would necessitate an interim relief against Union. There is an arguable point that if we were to issue interim mandatory injunction in such like cases, it might set a bad precedent in law that would enable the States to flout fiscal policies and still successfully claim additional borrowings," the bench said.

The court also framed issues for determination by the Constitution bench including whether Article 293 of the Constitution vests a State with an enforceable right to raise borrowing from the Union government and or other sources and the scope and extent of judicial review with respect to fiscal policy.

The Centre had earlier contended that giving additional borrowing to Kerala in Financial Year (FY) 2023-24 is neither prudent nor in the interest of the state government.

The Kerala government filed the original suit through its chief secretary alleging that the Union government has "taken control over its budgeting process" by executive actions.

The state government alleged that the Union is interfering with its power to borrow and regulate its own finances and also claimed it has no money to clear outstanding arrears of salaries, pension, and provident fund for state employees and for other beneficiaries in the state under various welfare schemes.

The Centre claimed that the financial edifice of Kerala has several cracks. The Centre has brought on record statistics to show the revenue deficit in Kerala as a percentage of gross state domestic product (GSDP) to be 3.17 per cent for 2021-22, higher than the all-states average of 0.46 per cent, and the fiscal deficit rate for Kerala to be 4.94 per cent compared to an all-state average of 2.80 per cent.

The state government, for its part, contended that imposition of a Net Borrowing Ceiling as deemed by the Union government limits borrowings from all sources including the open market and thus curtails the exclusive constitutional powers of the state.

The suit claimed that as on October 31, 2023, a sum of Rs 26,226 crores is imminently and urgently required in order for the plaintiff state to avert the impending grave financial crisis that has been caused by the impugned orders.

The suit said that the ability to determine the borrowing of the State in order to balance the budget and make up the fiscal deficit is exclusively within the domain of the states.