'It's A Right Under Article 131' : Supreme Court Asks Centre To Not Insist That Kerala Should Withdraw Suit To Allow Additional Borrowing


6 March 2024 8:14 AM GMT

  • Its A Right Under Article 131 : Supreme Court Asks Centre To Not Insist That Kerala Should Withdraw Suit To Allow Additional Borrowing

    The Supreme Court on Wednesday (March 6) expressed disapproval of a condition imposed by the Union Government on the State of Kerala that the former will give consent for additional borrowing only if the latter withdrew the suit filed in the Supreme Court.A bench comprising Justices Surya Kant and KV Viswanathan was hearing the suit filed by the State of Kerala against the Union under Article...

    The Supreme Court on Wednesday (March 6) expressed disapproval of a condition imposed by the Union Government on the State of Kerala that the former will give consent for additional borrowing only if the latter withdrew the suit filed in the Supreme Court.

    A bench comprising Justices Surya Kant and KV Viswanathan was hearing the suit filed by the State of Kerala against the Union under Article 131 of the Constitution challenging the curbs placed by the Union on the State's borrowing limits.

    On the last date of the hearing, the State had informed the Court that the Union agreed to allow additional borrowing to the extent of Rs 13, 608 crores but on the condition that the suit should be withdrawn.

    Today, the bench disapproved of the Union's stand, asking how such a condition can be placed. The bench said that the Union can impose other conditions, which are within the parameters of the Constitution, except the condition that the suit should be withdrawn.

    Addressing Attorney General for India R Venkataramani and Additional Solicitor General N Venkataraman, Justice Surya Kant said :  "One condition was that the demand can be considered only after the disposal or withdrawal of the suit. We are saying, for the time being, you can insist for acceptance of other conditions...but what we only want to suggest, you don't insist on the condition of withdrawal of the suit. Rest of the conditions, we understand your concerns.."

    "As an ad-hoc, provisional, interim arrangement, and to provide sufficient space...to bail out them from the crisis they perceive, all other conditions you are entitled to insist on except the condition of withdrawal of the suit...", Justice Kant made it more clear.

    Justice KV Viswanathan weighed in, "Would you be able to say this to an individual litigant? You can't say withdraw the suit. It is a constitutional right under Article 131."

    The ASG submitted that Kerala's suit is challenging the other conditions mentioned in the Union's circular. The bench said that the issues raised in the suit are "interesting" and that it will examine them.

    "The issues raised, these are interesting and as a Constitutional Court, we would like to examine. But as of now, don't put a peremptory condition like that. It is a peremptory condition on us too that we should not examine," Justice Kant said.

    AG R Venkataramani said that the issue was a matter of financial prudence and was beyond judicial adjudication. He said that the State has to first establish prima facie that it has the right to judicially challenge the Union's decisions, which is based on a fiscal policy.

    "What is presented to the court, these are propositions with underlying assumptions that the court's intervention is required. We seriously assail those assumptions. The court is being called upon to endorse those assumptions at this stage. That is why we said examine the issue within the parameters of financial prudence, which is outside the courts. You can't have it two ways," AG said.

    "It is right under Article 131," Justice Viswanathan reiterated.

    The bench said that it considers the Union's argument against the suit's maintainability as a preliminary objection but added that a decision will take time.

    The ASG submitted that if the Court entertained the suit, it can become a precedent for other states also to approach the Court seeking the Union's consent for additional borrowing as per their needs and it would become a "judicially unmanageable" situation. In response, Justice Viswanathan said, "But this is not a bar on suit."

    "The second set of conditions (withdrawal of the suit) is also in a way asking the Court that you don't go into the questions. That is a question we have to decide on the judicial side," Justice Kant said.

    The bench, however, clarified that it is conscious of the concerns of the Union regarding the impact of the State's borrowing and added that it can impose other conditions.

    "For the moment, you can proceed that the States require your consent for additional borrowing. And that the consent can be conditional," Justice Kant told the Union.

    Senior Advocate Kapil Sibal, appearing for the State of Kerala, submitted that the amount of Rs 13,608 crores was in any case within the entitlement of the State and was not a concession by the Centre. Sibal said that the State is facing a great financial crisis and is not in a position to pay off the salaries and Dearness Allowances. Even if the Rs 13,608 crores is allowed, it can only meet the needs of seven days. Hence, the State needed additional borrowing of Rs 15,000 crores, Sibal urged.

    The Court asked the Union and the State to hold a meeting today or tomorrow to resolve the issues.

    "Hold a meeting, take this 13,608, make out a case for the remaining, except for the condition of withdrawal of suit," Justice Kant told both the parties.

    "We will do one thing. Rs 13608 crores, you(Union) yourself will do. We aren't passing any order. As regards additional demand, a meeting be held, either today or tomorrow. And if you find, some additional amount can be released, subject to whatever conditions permissible as per Constitution except the condition for withdrawal of suit, do it," Justice Kant told the AG and the ASG.

    Justice Kant also told Sibal to advise the political leaders of the State to refrain from public comments on the sub judice issue. While agreeing to cooperate, Sibal said that public statements were made by a high-seated person of the Union Government as well.

    The issue raised in the suit relates to the interpretation of Article 293 of the Constitution and the ambit of fiscal autonomy of the States to borrow from the market without the consent of the Union.

    Sibal submitted that Kerala, owing to high population density, is not a manufacturing state and the main sources of income are from tourism and IT. So, human resources are the main capital asset of the State and hence it must make substantial budgetary allocations for education and health services.

    "We, decide our own budget. Union cannot control our budget. Our budget is tailor-made to the needs of our people," Sibal said. He added that the State's borrowing has never breached the Fiscal Responsibility Act. 

    Since the borrowing was not from the Union, Sibal questioned the basis for the Union insisting on its consent.  

    "Is it your case that there are states which are given favourable treatment?," Justice Kant asked during the hearing.

    "Yes, we have given the example of the State of Uttar Pradesh," Sibal replied. 

    "We are in a state of emergency, we need some breather," Sibal submitted.

    "What is the emergency," Justice Kant asked.

    "We can't pay out public funds, pension, DA, pay revision. There is a critical Over Draft position. And if we miss two Tuesdays, we can't borrow from RBI," Sibal stated.

    AG submitted that the State cannot expect the Court to endorse the mess they have created. ASG stated that the revenue projection of the State is 50% of the projected expenditure and urged that the Court should be mindful of the ramifications on the economy.

    "Part A comprises of 34,495 crores of tax devolutions, grants and other transfers of the Union. This is one part. Second, borrowings, which require our consent. We have given consent till January 4 to the extent of 34, 230 crores. On the suggestion of this Court, we sat in the North Block and we agreed for another 13, 608 crores. Which becomes 47,838 crores. If you add the 34,000 and 48,000 it comes to 82,000 crores. The revenue estimate of Kerala is only 50% of it(projected expenditure). 93,000 crores.The projected expenditure for 2023-24 is 2,17,815 crores. See what can happen if we allow suits like this by states. How it will become judicially unmanageable," ASG said.

    Remarking that a suit of this nature of first of its kind, the bench said that it will examine the issues raised.

    "Before such a situation arises in A state or B state next Financial Year, we would like to adjudicate these issues," Justice Kant said.

    After the hearing ended, Sibal requested that the matter be posted next Monday again. The bench granted Sibal liberty to mention the matter if listing is required.

    Read Full Court Room Exchange Here :  Kerala v. Union Suit On Borrowing Limits : Full Courtroom Exchange From Supreme Court Hearing


    The genesis of this legal dispute dates back to December, when Kerala petitioned the apex court, denouncing what it deemed as undue interference from the central government in its fiscal affairs.

    The State has contended that the Centre has imposed a Net Borrowing Ceiling(NBC) and has included borrowings made by the State Owned Enterprises to compute the NBC, which has limited the state's borrowing powers. The State also took objection to the Centre taking into account the liabilities arising from the Public Account of the States to compute the NBC.

    The state asserted that certain directives and amendments issued by the Ministry of Finance were inhibiting its ability to fulfil budgetary commitments, thereby imperilling vital welfare schemes and developmental initiatives outlined in its annual budgets. Central to Kerala's grievances are concerns over a lowered borrowing limit imposed by the Union, potentially precipitating a severe financial crisis with the state urgently requiring around Rs 26,000 crore to meet its financial obligations.

    In a written note submitted to the court, the union government defended its actions as essential measures aimed at safeguarding macroeconomic stability. Attorney General Venkataramani, on behalf of the Centre, emphasised the potential ramifications of unchecked state borrowing 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 at the state level.

    However, the Kerala government, in an affidavit, vehemently opposed this narrative, arguing that the Constitution grants states autonomous authority over their public debts. The state's response challenges the Union's interpretation of Article 293, contending that the consent mechanism outlined in the provision primarily serves to protect the Union's position as a creditor, rather than conferring overarching powers to regulate state borrowing.

    Not only this, Kerala countered the Union's assertions of fiscal mismanagement, citing its robust investments in social sectors like health and education, which have contributed to the state's commendable human development indices. The state government also critiqued the Union's fiscal track record, highlighting reports indicating India's precarious debt-to-GDP ratio and stagnant credit ratings.

    State of Kerala v. Union of India | Original Suit No. 1 of 2024

    Next Story