'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 domainPublic Debt of the State is an item (Entry 43) included in List II of the Seventh Schedule and the Public Debt of the Union is an item (Entry 35) included in List I of the Seventh Schedule. Therefore, Kerala contended, that both the States and the Union have complete autonomy and independent authority over their respective public debts.When the Public Debt of a State itself is an item in List II of the Seventh Schedule, the Union cannot exercise control over the debt of any State The Union cannot, under the pretext of 'sound public financial management' violate or encroach upon the plenary powers of the States granted under the Constitution.The State also questioned the interpretation given by the AG that the Union's consent is required for the States to borrow as per Article 293. It contended that the consent of the Union, as per Article 293(3), is required only if there are any outstanding dues from the State to the Union. "The consent mechanism is merely to protect the Union as the major creditor to the States. If the object of Article 293(3) and (4) had been to enable the Defendant Union to regulate the debts and borrowings of a State in general, then such consent mechanism would have been made applicable, if the State owes any debt to anybody or any of its creditors – and not merely, if there is a loan made by the Union to the State that is outstanding. Therefore, the purpose of Article 293(3) and 293(4) is clearly only for protecting the Defendant Union's position as a creditor; any other contention is contrary to the plain reading of the provision.The contention that the purpose of Article 293 is to confer some overarching powers upon the Union for the purpose of ensuring macroeconomic stability, or using the same to violate the plenary financial powers of States, has no foundation in the Constitution or in the recommendations of the Expert Committee that was appointed by the Constituent Assembly."The decision to include “Public Debt of the State” as a distinct Entry in the State List under Article 245, evidently arose from the clear understanding of the founding fathers of the Constitution that if the States are not put in charge of their public debt, then the authority under the Constitution to formulate their budget (Article 202) and to borrow money for the same (Article 199) would be rendered meaningless. Centre accounts for most of the country's debtsRebutting 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 ...

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

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Centre accounts for 60% of the country's debts, hence the premise that borrowings of the States can destabilise the economy is exaggerated, Kerala said.

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