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India's federalism debates usually revolve around Raj Bhavans, delayed assents and the political role of Governors. But a quieter and deeply structural contest is now occupying the Supreme Court, and it speaks the language of balance sheets. Kerala's suit against the Union government over its Net Borrowing Ceiling and Karnataka's petitions regarding tax devolution ask a sober constitutional question. When the Union holds the larger purse and the States carry the larger burden of public services, who decides how much a State may borrow, spend and receive?

Article 131 provides the Supreme Court exclusive original jurisdiction over disputes between the Union and a State, strictly limited to questions on which the existence or extent of a legal right depends. That qualifier remains the Union's primary line of defence. In its 1970 judgment in State of Bihar v. Union of India, the Court insisted on a tangible legal right rather than a mere political or administrative grievance. Yet subsequent larger benches in State of Rajasthan v. Union of India, 1977 and State of Karnataka v. Union of India,1977 confirmed that states can indeed invoke this jurisdiction to test the constitutional limits of executive action by the Centre.

The Union maintains that Kerala is describing financial hardship rather than a legal right. Kerala counters that Article 293(1) vests the State with an explicit executive power to borrow, making interference with this power a classic legal injury. Recognizing the weight of this constitutional friction, a bench comprising Justices Surya Kant and K.V. Viswanathan referred the matter to a Constitution Bench in April 2024, observing that the mechanics of Article 293 had never been substantially interpreted by the Supreme Court.

Article 293 gives states the executive power to borrow upon the security of their Consolidated Funds within limits fixed by their own legislatures. The friction arises from Article 293(3), which mandates prior consent from the Union if any part of a previous central loan remains outstanding, and Article 293(4), which allows the Centre to attach conditions to that consent.

Both sides find textual comfort here. The states argue that Article 293(3) is merely a creditor's safeguard attached to Union money and not a blanket licence to regulate state finances. Public debt of the state is explicitly a state subject under Entry 43 of List II. Furthermore, imposing a borrowing ceiling that includes state-owned enterprise borrowings and Public Account liabilities stretches the definition of a loan beyond its natural statutory meaning.

The Union responds that because almost every state carries some central loan, consent is inevitably required. The Union argues that a state's debt directly shapes the country's sovereign credit rating and macro-economic stability. Conditions anchored in Finance Commission recommendations and the Fiscal Responsibility and Budget Management Act are framed as the ordinary price of a coordinated national economy.

The real constitutional test is not whether the Centre can impose conditions since the text plainly allows it, but the permissible extent of those conditions. A rigorous reading requires such conditions to be germane to the purpose of the consent, proportionate and uniformly applied. Drawing on the doctrine of manifest arbitrariness established in Shayara Bano v. Union of India, Kerala argues that the Union violates Article 14 by counting state-linked off-budget borrowing against the state while treating its own extra-budgetary borrowing completely differently.

Federalism is undeniably a basic feature of the Constitution, a principle echoing from Kesavananda Bharati v. State of Kerala,1973  through S.R. Bommai v. Union of India,1994 to the cooperative federalism articulated in Government of NCT of Delhi v. Union of India,2018. Most recently, in the 2024 Mineral Area Development Authority decision, 2024 a nine-judge bench reaffirmed that Parliament cannot easily erode the fiscal entries guaranteed to the states.

Fiscal autonomy is a core component of this federal structure. A state that cannot finance its constitutional duties in health, policing and agriculture is not autonomous. However, Articles 275, 280 and 293(3) structurally build Union coordination into the constitutional design. Autonomy must be protected at its core, ensuring the capacity to meet constitutional obligations, while the periphery remains open to proportionate regulation. Elevating every executive fiscal dispute to a basic structure violation risks inflating the doctrine into a general-purpose weapon. The more jurisprudentially sound route is the ordinary interpretation of Article 293, strictly disciplined by Article 14 equality parameters.

This brings us to the enforceability of fiscal sharing. Articles 270 and 280 place the sharing of tax proceeds on the recommendations of the Finance Commission. Article 281 requires the President to lay those recommendations before Parliament. The Constitution deliberately uses the word recommend, not direct.

The Supreme Court has never explicitly ruled that Finance Commission recommendations are strictly binding. The closest modern analogy is the 2022 decision in Union of India v. Mohit Minerals Pvt. Ltd where the Court held GST Council recommendations to be persuasive rather than mandatory, noting that cooperative federalism contemplates dialogue over command.

However, a recommendation from a constitutionally mandated expert body generates a duty of good-faith consideration and reasoned departure. A structural anomaly has emerged where revenues raised through cesses and surcharges under Article 271 sit outside the divisible pool, allowing a growing share of Union revenue to escape devolution. While constitutional courts will be slow to rewrite devolution percentages, they possess the jurisdiction to examine whether the Union complied with Article 281, whether its reasons for departure were relevant and whether the delay in releasing statutory entitlements like disaster relief funds amounts to arbitrary inaction.

Looking outside India, Australia managed its fiscal federalism through a 1927 Financial Agreement that created a Loan Council to coordinate borrowing, subsequently shifting from hard limits towards market discipline while preserving the Commonwealth's leverage through conditional grants. Conversely, in Canada, provinces borrow on their own credit without federal permission and are disciplined by rating agencies. When provinces challenged unilateral reductions in federal transfers in Reference re Canada Assistance Plan ([1991] 2 SCR 525), the Supreme Court of Canada declined to restrain Parliament, treating the transfers as a matter of legislative choice.

The pending Constitution Bench judgment presents a historic opportunity to produce a durable framework for India. Establishing that Article 131 is available where a state asserts a real legal right under Article 293, and mandating that conditions under Article 293(4) must be reasoned, proportionate and applied evenly across both Union and State off-budget borrowings, will mature Indian federalism. It ensures that fiscal autonomy is not merely declared in constitutional preambles but protected in the actual arithmetic of governance.

Author is an Advocate practicing at Delhi High Court. Views are personal.

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