Borrowing limit: No interim relief to Kerala; SC refers suit to Constitution Bench

The Supreme Court on Monday (April 1) referred to a five-judge Constitution Bench the suit filed by the Kerala government against the Union government challenging the limits it had imposed upon the state’s borrowing capacities.

The Bench also refused to pass any order on the interim relief sought by Kerala for additional borrowing for the financial year 2023-24. The SC observed that Kerala has received substantial relief from the Centre after the intervention of the court, and that the prima facie case and the “balance of convenience” were in favour of the Union government.

A Bench of Justices Surya Kant and KV Viswanathan passed the order on the state's suit, accusing the Centre of interfering in the exercise of its "exclusive, autonomous, and plenary powers" to regulate the state's finances by imposing a cap on borrowing.

Articles 293 and 131 of the Constitution

The Bench referred to Article 293 of the Constitution, which deals with borrowing by states, and said this provision has not been so far subject to any authoritative interpretation by the apex court. It said that the state’s suit brought up issues connected with the interpretation of the Constitution and therefore referred the matter to a Constitution Bench.

The judges felt that the suit has brought up the question of whether the borrowing by state-owned enterprises and liabilities arising from public accounts should come under the purview of Article 293(3) of the Constitution.

In an original suit filed under Article 131 of the Constitution, the Kerala government has said the Constitution bestows fiscal autonomy upon states to regulate their finances under various articles, and the borrowing limits or the extent of such borrowings are regulated by state legislation.

Article 131 of the Constitution deals with the original jurisdiction of the apex court in any dispute between the Centre and states.

Background

The origins of this dispute go back to December last year when the Kerala government approached the apex court denouncing the central government’s “encroachment” over its fiscal affairs. The state was of the opinion that certain directives issued the Union Ministry of Finance inhibited the state’s ability to fulfil its budgetary commitments, thereby putting at stake important welfare schemes and developmental objectives that had been given in its annual budgets.

The most important point raised by Kerala was the lower borrowing limit imposed by the central government thereby potentially leading to a severe financial crisis. The state said it needed ₹26,000 crores to meet its financial obligations.

The Union government defended its actions saying it was essential to safeguard macroeconomic stability, and that unchecked state borrowing could affect the country’s credit rating and financial stability.

However, the Kerala government opposed this argument in an affidavit and said that the Constitution granted the states autonomous authority over their public debts. The state also challenged the centre’s interpretation of Article 293, saying that it served to protect the Union’s position as a creditor rather than giving it overarching powers to regulate state borrowing.