The Supreme Court, in its recent proceedings, showcased reluctance to intervene in a suit initiated by the Kerala government against the constraints imposed by the Centre on its borrowing authority. Scheduled for further deliberation on March 6, the court advised Kerala and the Centre to persist with negotiations regarding the “purely financial” matter.
The court’s stance emerged following Kerala’s disclosure that discussions with the Centre had faltered due to a stipulation requiring Kerala to retract the legal suit if it sought to engage in borrowing activities. Representing the Kerala government, senior advocate Kapil Sibal elucidated that the state’s claim amounted to ₹24,000 crore, of which ₹11,000 crore constituted its entitlement. However, Sibal emphasized that the Centre mandated the withdrawal of the lawsuit as a prerequisite for even considering this amount.
Sibal underscored the disparity faced by Kerala, highlighting that while other states in India had been granted ₹5,000 crore for power sector reforms, Kerala was denied this allocation owing to the ongoing litigation. Moreover, Sibal argued that Kerala’s borrowing surge was a result of investments in education and healthcare, yet the state faced penalties for its commendable progress in human development indices.
On behalf of the union government, additional solicitor general N. Venkataraman contended that the offers extended during negotiations upheld the principles of federalism. He mentioned an offer of ₹13,608 crore, albeit contingent upon Kerala withdrawing the legal suit. Venkataraman emphasized that Kerala had exceeded its borrowing limit by over 20% and needed to adhere to terms and conditions to facilitate its power sector reforms. He advocated for negotiation and compliance with conditions as opposed to resorting to litigation.
The suit initiated by the Kerala government challenged the imposition of a net borrowing ceiling by the finance ministry, which restricted the state’s borrowing activities from all sources, including the open market. In response, the Centre attributed any financial strain experienced by the state to mismanagement.
According to the Union government, substantial financial assistance had been extended to the Kerala government from 2020-21 to 2023-24, surpassing the amount recommended by the 15th Finance Commission. Notably, one such assistance included a payment of ₹14,505 crore as a “back-to-back loan to address the GST compensation shortfall.” The Centre emphasized that the management of public finances was a national concern with implications for the country’s credit rating.
In a parliamentary response in December, Finance Minister Nirmala Sitharaman clarified that there were no plans to relax the existing terms governing the borrowing capacity of state governments, including Kerala, for the fiscal year 2023-24.
The legal tussle between Kerala and the Centre underscores broader issues concerning fiscal autonomy, federal relations, and financial management. As the matter awaits further adjudication, the outcome will significantly impact the fiscal landscape and governance dynamics between the central and state governments.