Will Allow Additional Borrowing By Kerala If They Withdraw Suit, Centre Tells Supreme Court

Awstika Das

19 Feb 2024 4:00 PM GMT

  • Will Allow Additional Borrowing By Kerala If They Withdraw Suit, Centre Tells Supreme Court

    The Supreme Court was informed on Monday (February 19) that talks to resolve the deadlock between the Centre and the State of Kerala over the former's curbs on the state's borrowing limits has not yielded any results.A bench of Justices Surya Kant and KV Viswanathan was hearing the Kerala government's prayer for interim relief in its suit filed against the Union of India over...

    The Supreme Court was informed on Monday (February 19) that talks to resolve the deadlock between the Centre and the State of Kerala over the former's curbs on the state's borrowing limits has not yielded any results.

    A bench of Justices Surya Kant and KV Viswanathan was hearing the Kerala government's prayer for interim relief in its suit filed against the Union of India over borrowing limitations. These interim prayers have been filed in an original suit by the state government challenging what it perceives as encroachments on its financial autonomy by the central government.

    On the last occasion, the bench recommended that Kerala engage in dialogue with the Union to break the deadlock through negotiation. 

    Accordingly, last week, talks were held between State of Kerala, with its delegation including Finance Secretary KN Balgopal, the Chief Minister's Principal Secretary KM Abraham, the Finance Department's Principal Secretary Rabindra Kumar Agarwal, and Advocate General K Gopalakrishna Kurup, and the Centre, represented by Finance Secretary TV Somanathan, Additional Solicitor General N Venkitaraman, Additional Secretary Sajjan Singh Yadav and Joint Secretary Amita Singh Negi. However, the negotiations reportedly failed to yield any result.

    The talks have not been successful, Sibal informed the court today, pinning the blame squarely on the Centre's alleged reluctance to release even the Rs 11,731 crores requested by the state government to which it was stated to be entitled in terms of their own policy. He read out from the central government's offer -

    "The first two requests would entail a relaxation of the guidelines of the department of expenditure, which are already under challenge in this suit. The third request is with respect to conditional borrowing. The power of the government to impose conditions has also been challenged by the state government. Therefore, if the State of Kerala agrees to withdraw the suit, the Government of India is willing to consider the aforesaid requests in view of the current precarious financial situation of the state."

    "What is going on?" Sibal exclaimed with exasperation.

    Objecting to Sibal's allegations, Additional Solicitor General N Venkataraman explained that the total borrowing of the state government to which the Centre consented was Rs 34,230 crores before the suit was filed, which was Rs 1,788 crores above the statutory ceiling of three percent of the Gross State Domestic Product (GSDP). At the meeting, the law officer further added, the central government offered an additional borrowing facility of Rs 1,877.57 crores based on Kerala government's calculations without going into the details of the figures in view of the urgency expressed, and an additional borrowing space of Rs 11,731 crores subject to the withdrawal of the suit of which an amount of Rs 4,322 crores would be allowed by adopting figures of estimated public accounts of Kerala for 2023 instead of three years' average as per the guidelines, an amount of Rs 2,543 crores would be allowed for repayment of off-budget borrowings done by two entities, and an amount of Rs 4,866 crores subject to compliance with performance criteria in power sector certified by power ministry. ASG Venkataraman added -

    "Earlier, we exceeded by almost Rs 2,000 crores by consent. Now, we are saying that we will consent to additional borrowing space of Rs 13,608 crores plus an additional Rs 1,877 crores. So in total, Rs 15,000 crores plus Rs 2,000 crores in excess of the GSDP...It should be limited at Rs 32,000 crores but we are willing to allow Rs 49,000 crores in the spirit of true federalism. Then, if we ask them to withdraw the suit, how is it an unreasonable request?"

    Sibal, however, maintained that the State of Kerala had raised an accurate demand for additional borrowing of Rs 24,000 crores. He also complained, "All states in India will get 5000 crores for power sector reforms, but they are not giving Kerala this money just because we have filed this suit. This is not cooperative federalism."

    "When it comes to power sector reforms, they will have to meet the terms and conditions. You cannot talk, and also litigate. We are willing to travel beyond the guidelines," ASG Venkataraman countered.

    Agreeing, Justice Kant later remarked, "If they are willing to release something through negotiations, they are also right in asking you to not litigate."

    When a verbal row broke out between the two lawyers on whether the State of Kerala should be allowed to over-borrow with the excess being adjusted in the next year, Justice Kant interjected saying, "What appears to us that there is still some misunderstanding. The Centre is also open to providing assistance and rescuing you from this crisis, and you also have some apprehensions. If you can continue the spirit of negotiation, then it's fine..."

    "This is on a pure financial thicket. How much can a court get into...That too by way of an interim order?" Justice Viswanathan asked. Justice Kant added that the cross-country impact and consequences of any such order would have to be examined by the court before issuing it.

    Sibal reasoned -

    "The over-borrowing that has occurred in our particular case is because of our expenditure in education and health. We are far ahead of human development indices when compared to every other state. We are a hundred percent literate state. We are being punished for doing good for the people. The fiscal deficit is the only way in which we can make capital expenditure. Otherwise, there will be no capital expenditure. We will only run on revenues. Therefore, this is essential for development."

    "Where 60 percent is the average spent on expenditure, Kerala has spent 82.4 percent. It has exceeded by 22 percent on expenditure, not on capital" ASG Venkataraman argued.

    The issues would have to be examined, the bench said, before directing the matter to be listed for further hearing on March 6.

    Explaining the urgency of the case, Sibal said, "If it goes till the end of this year, we will default. They can also declare financial emergency under the Constitution. The idea is clear when the Centre refuses to release what the state is entitled to."

    To this, the government law officer assured that such an eventuality was not desired. Justice Kant added, "Mr Sibal, mentally prepare yourself that we may not be able to pass an interim order. We are not subject-matter experts. But we will examine all the aspects."


    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 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.

    Case Details

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

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