The Supreme Court on January 12 agreed to examine an original suit filed by Kerala alleging that the Centre was violating the federal structure of governance and causing “severe damage to the economy of a small State with meagre resources” by interfering with the finances of the State.
A Bench headed Justice Surya Kant issued summons to the Union of India through the Attorney-General. It listed Kerala’s application for interim reliefs, which include an injunction order to restrain the Centre from curtailing the State from borrowing ₹26,226 crore to clear “unmet arrears and immediate obligations”, on January 25.
The original suit said a State, in a federal system of governance, has the exclusive power to regulate its finance through preparation and management of its budget and borrowings.
The State, represented by senior advocate Kapil Sibal and advocate C.K. Sasi, contended that recent actions, amendments and executive orders by the Centre were calculated to reduce Kerala to a state of penury.
Kerala said the Centre has imposed a net borrowing ceiling (NBC) on the State in an arbitrary manner, limiting borrowings from all sources, including the open market. The Centre has deducted borrowings by State-owned enterprises where the principal and/or interest is serviced out of the budget or where such borrowings are made to finance schemes announced by the State. The Centre has also imposed conditions on the State taking loans from outside India.
The State said amendments made to the Fiscal Responsibility and Budget Management Act, 2003, has amounted to a blatant encroachment into the “legislative domain of the State, as ‘public debt of the State’ is an item exclusively in the State List in the Seventh Schedule under Article 246 of the Constitution”.
The amendments have violated “fiscal federalism” by creating unconstitutional limits and impediments on the State to borrow and regulate its own finances.
The actions of the Centre have interfered with the exclusive constitutional power of Kerala to even “define” its annual budget and seek approval of the legislature for allocation of funds.
It has handicapped the plenary power of Kerala to manage its public debt, public account and the Consolidated Fund of the State; create and run State-owned enterprises; legislate on its borrowings; and borrow on the security of its Consolidated Fund.
‘Grave crisis’
Kerala said the Centre’s orders have “brought the operation of the State’s budget to a grave crisis”.
“Unless the net borrowing ceiling, as fixed by the Kerala Fiscal Responsibility Act,2003, based on which the State budget has been drawn up and approved by the legislature is restored, the State is legitimately apprehensive that its treasury operations will be halted or starkly curtailed. This is a dire situation looming ahead and the immediate consequences to the State will be catastrophic,” the suit highlighted.
Kerala said it has already suffered a cumulative expenditure loss or resource deficiency of ₹1,07,513.09 crore over fiscal year period between 2016 and 2023.
“The inability to fulfil the commitments in its annual budgets has resulted in huge arrears that the State owes by way of welfare schemes to the people of the State, particularly the poor and the vulnerable, various beneficiary groups, the employees of the State government, its pensioners and dues to its State-owned enterprises… These dues have accumulated over the years because of financial constraints due to the imposition of borrowing ceiling by the Union… As on October 31, 2023, ₹26,226 crore is imminently and urgently required in order for the plaintiff State to avert the impending grave financial crisis,” the suit said.
It is estimated that over a period of the next five years, the net loss sustained by State’s economy could be as high as ₹2 lakh crore-₹3 lakh crore, the State said. “If the damage is not prevented, the State, with its meagre resources, will not be able to recover from this for decades,” the suit noted.
