Why Supreme Court denied interim relief to Kerala in borrowing limit suit

The Kerala government’s bid for interim relief in its legal tussle with the Centre over borrowing constraints hit a roadblock after the Supreme Court expressed prima facie agreement with the Centre's stance that if borrowing limits were exceeded in the previous year, reductions in borrowing are permissible in the subsequent year.

Justices Surya Kant and KV Viswanathan underscored the weight of the issues raised, signalling the need for a thorough examination by a larger, five-judge constitution bench.

Constitutional issue

“Since Article 293 of the Constitution has not been so far the subject to any authoritative interpretation by this court, in our considered opinion, the aforesaid questions squarely fall within the ambit of Article 145(3) of the Constitution. We, therefore, deem it appropriate to refer these questions for pronouncement by a bench comprising five judges,” read the order.

With respect to the claim for interim relief, Kerala argued that if the interim injunction was not granted, it was likely to face extreme financial hardship on account of pending dues. As against this, the Centre highlighted “the grave consequences regarding the fiscal health of the country if the plaintiff is allowed interim relief”.

‘Spill-over effects’ of state borrowings

The Centre also argued that additional borrowing by the state will have spill-over effects and may raise the prices of borrowing in the market, possibly crowding out the borrowing by private investors. This may then have an adverse impact on the production of goods and services in the market, possibly affecting the economic wellbeing of every citizen.

The Kerala government had taken its grievances to the Supreme Court, contesting the imposition of a borrowing limit by the Centre. It argued that this restriction had plunged its budget operations into a severe crisis, and furthermore, it infringed upon the principles of fiscal federalism.

Centre’s agrument

Since the central government borrows money from outside the country and lends it to state governments, borrowings of the states are intricately linked to the creditworthiness of the country in the international market. Hence, the Centre argued that in case such borrowings by state governments are not regulated, it may negatively impact the macro-economic growth and stability of the entire nation.

The top court explained that in assessing the request for interim relief, it had weighed the triple test of a prima facie case, the balance of convenience, and the potential for irreparable injury.

SC’s assessment

Despite this evaluation, the bench opted against granting interim relief, asserting that the balance of convenience currently favoured the central government.

“On a comparative evaluation of the submissions, it seems to us that the mischief that is likely to ensue in the event of granting the interim relief will be far greater than rejecting the same. If we grant the interim injunction and the suit is eventually dismissed, turning back the adverse effects on the entire nation at such a large scale would be nearly impossible,” the apex court said.

“Au contraire, if the interim relief is declined at this stage and the plaintiff-state succeeds subsequently in the final outcome of the suit, it can still pay the pending dues, may be with some added burden, which can be suitably passed on the judgment-debtor. The balance of convenience, thus, clearly lies in favour of the defendant – Union of India,” the order said.

Pros and cons

“We may hasten to remind ourselves at this stage that according to the Union of India, the plaintiff state is apparently a highly debt stressed state that has mismanaged its finances. This statement, however, is strongly refuted by the state. According to the Union, the plaintiff has the highest ratio of pension to total revenue expenditure among all states and requires urgent measures to reduce its expenditure. Instead of doing so, the plaintiff is borrowing more funds to meet its day-today expenses such as salaries and pensions.”

Accordingly, the defendant has contended that the financial hardship was not attributable to the regulation of the plaintiff’s borrowing and was actually a consequence of its own actions. Furthermore, the defendant maintains that restriction on the borrowing was a step towards the betterment of fiscal health of the state because if such borrowings are not restricted, the plaintiff’s position will become more precarious, leading to a vicious cycle of deteriorating financial health and increased borrowing to repair the same.

Centre’s view upheld

Inclining with the Centre’s argument, the apex court observed that “if the state has essentially created financial hardship because of its own financial mismanagement, such hardship cannot be held to be an irreparable injury that would necessitate an interim relief against Union”.

“There is an arguable point that if we were to issue interim mandatory injunction in such like cases, it might set a bad precedent in law that would enable the states to flout fiscal policies and still successfully claim additional borrowings,” it said.

Political consequences

The top court also said that prima facie, “we are inclined to accept the argument of the Union (government) that where there is over-utilisation of the borrowing limit in the previous year, to the extent of over-borrowing, deductions are permissible in the succeeding year, even beyond the award period of the 14th Finance Commission. This is, however, a matter which will have to be finally decided in the suit”.

The Supreme Court’s decision not to grant interim relief to the state could have significant implications for Kerala’s financial stability. It may also emerge as a focal point for the opposition, potentially becoming a rallying cry against the ruling LDF government, ahead of the Lok Sabha elections. The government may find itself facing heightened scrutiny and criticism, possibly having to defend its position on the streets in the days ahead.