'Union Can't Control Debts Of Any State, Centre Accounts For 60% Country's Debts': Kerala Tells Supreme Court In Suit Against Borrowing Limits

The Constitution does not confer any power to the Union Government to control the debts of any State, said the State of Kerala in its reply affidavit filed in the Supreme Court.

The affidavit is a response to a written note submitted by the Attorney General for India in the suit filed by Kerala challenging the limits imposed by the Central Government on the State's borrowing powers.

While Kerala challenged the Centre's actions as an infringement of the State's fiscal autonomy and the principles underlying Article 293 of the Constitution, the Attorney General defended them as measures necessary to protect the macroeconomic stability of the nation. Raising concerns about "reckless borrowing by States", the AG said that the debts of the States affect the country's credit rating. The AG also blamed the State for its financial stress, saying that they are the result of Kerala's financial mismanagement and criticised the practice of "off-budget borrowing" through State-Owned Enterprises.

In response, the State said that the AG's note, which is not backed with any affidavit, is "mostly rhetoric", without touching upon the serious constitutional issues raised in the plaint. It added that the note made disparaging statements about the State's financial management, in a myopic and misleading manner, although it is not an issue involved in the plaint. Therefore, the State contended that the statements in the AG's note were intended to divert the attention of the Court from core legal issues.

Union can't encroach into the State's domain

Rebutting the AG's statements on the borrowings by States, Kerala's reply affidavit stated :

"The Central Government accounts for approximately 60% of the total debt or outstanding liabilities of India. All the States put together account for the rest (approximately) 40% of the total debt of the Country."

Kerala accounts for a minuscule 1.70-1.75 per cent of the total debt of the Centre and the States put together for the period 2019-2023. Therefore, the premise that borrowings of the Plaintiff State can destabilise the economy is exaggerated.

Even a premise that all States would indulge in financial profligacy, which would have an impact on the national economy is highly hypothetical and simplistically conflated, as (i) it presumes that State Governments would necessarily borrow imprudently unless the Central Government monitors them; and (ii) it ignores the fact that borrowings by States are governed by market forces, which sufficiently regulate and deter any such propensity to be reckless and profligate and (iii) that all States can only borrow under the Limits set by the State Legislatures under their respective Fiscal Responsibility Legislations. 

Union has a dismal record of reining in its own debt

Kerala stated that the "Union has a dismal record of reining in its own debt" and has "grossly underperformed in its management of public finances – even in comparison to several Emerging Countries."

Reference was made to the 2023 report of global credit rating agency Moody's which retained India at the lowest level. The 2023 IMF report was also cited which placed India in the group of countries where the Debt exceeds its GDP.

In this backdrop, the State's affidavit said :

"...the greatest threat to macroeconomic stability of the country is posed by the economic and financial policies pursued by the Defendant Union and not by the States, as sought to be made out throughout the Note.

Therefore, considering that the greatest risk to macroeconomic stability emerges from the fiscal mismanagement of the Defendant Union, the plea of sound fiscal management as an attempt to justify encroachment into the plenary financial powers secured for the Plaintiff State under the Constitution is clearly a bogey."

Kerala stated that the credit rating of the States and their Enterprises, especially at the global level are adversely impacted by the rating of the Union itself. For instance, when the Kerala Infrastructure Investment Board (KIIFB) raised funds through External Commercial Borrowings, the rating that was given to it was with reference to the poor credit rating that the Union has in the global market.

States can't recklessly borrow, only the Union can

"If any level in the federal structure in India can borrow “recklessly”, it is only the Union Government that can do it," the State said.

In this regard, reference was made to the amendment made to the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act, 2003) in 2018 to introduce an escape clause under Section 4(2). The State said that this clause allows the Centre to breach its fiscal limits prescribed in the Act.  

Rebuffing the AG's statement that Kerala is financially mismanaged, the State said that it is both unfair and irrational to compare the State's fiscal parameters with the average of All States. The State said that it makes more budgetary allocations for health and public education when compared to other States and this resulted in a higher human development index. The fiscal deficit and debt are directly an outcome of the State investing heavily in the health and education of its people. This deliberate focus on its people over the last several decades is what has made Kerala the frontrunner in the Human Development Index in the country.

The Supreme Court will hear the suit on February 13 to hear the prayers for interim relief.