Case title: State of Kerala vs. Union of India
Case no.: Original Suit No. 1 of 2024 with I.A. No. 6149 of 2024
Order on: 1st April 2024
Quorum: Justice Surya Kant and Justice K.V. Viswanathan
FACTS OF THE CASE
In the recent case of State of Kerala vs. Union of India, the Supreme Court of India deliberated on the constitutional provisions concerning fiscal responsibility and borrowing limits. The case, originating from Original Suit No. 1 of 2024, raised pivotal questions regarding the powers of the Union of India to regulate state borrowing and the interpretation of Article 293 of the Constitution.
The State of Kerala filed an Original Suit challenging several actions by the Union of India, including amendments to the Fiscal Responsibility and Budget Management Act and the imposition of a ‘Net Borrowing Ceiling.’ Kerala argued that these actions infringed upon its borrowing rights under Article 293 of the Constitution. The suit also sought interim relief to allow Kerala to borrow a specified amount immediately.
The defendant, the Union, has imposed limitations on the plaintiff, the State, regarding its maximum borrowing capacity, encompassing various sources such as open market borrowing, liabilities from the public account, and State-owned enterprises.
Additionally, the Union has authorized the plaintiff to engage in open market borrowing up to a specific limit of INR 1,330 crores, while setting a total ceiling for open market borrowing at INR 21,852 crores for the fiscal year 2023-2024.
The plaintiff asserts that the Union has overstepped its authority as outlined in Article 293 of the Constitution of India, contending that the Union lacks the jurisdiction to regulate all borrowings by a State. Furthermore, the plaintiff seeks an immediate interim injunction to access INR 26,226 crores to meet obligations such as pension schemes and subsidies. They argue that they have not fully utilized the borrowing limit allotted in previous years and can repay the borrowed amount on time, adhering to the Domar Model.
In response, the defendant refutes the plaintiff’s interim injunction request, asserting its authority to regulate all State borrowings in order to safeguard the nation’s financial stability. The defendant contends that restricting borrowing is crucial for national public financial management.
CONTENTIONS OF THE PLAINTIFF
The Plaintiff argues that the Union of India’s authority is limited to regulating loans sought from the Central Government and does not extend to all State borrowing. It is asserted by the Plaintiff that liabilities from the Public Account and State-Owned businesses are not considered part of borrowings. There is an urgent need for INR 26,226 crores to address obligations including pension schemes, financial aid, and living allowances. According to the audit of the Finance Account by the Comptroller and Auditor General of India, and meetings fiscal deficit targets, the Plaintiff-State has not fully utilized its permitted borrowing capacity in the past three years (2020-2021, 2021-2022, and 2022-2023), leaving INR 24,434 crores untapped.
The Plaintiff urges permission to use the underutilized borrowing space from previous years. The State contends that it should be allowed to borrow up to the maximum allowable fiscal deficit based on paragraphs 12.64 and 12.65 of the 15th Finance Commission report. It is argued that the Plaintiff’s debts are sustainable as they adhere to the Domar Model, indicating that the State’s Gross State Domestic Product(GSDP) is growing at a faster rate than its effective interest rate.
CONTENTIONS OF THE RESPONDENTS
The defendant asserts that the management of public funds is of national importance, giving it the authority to oversee all borrowing by the State to safeguard the financial health of the nation. It is contended that certain debts of the State from specific public accounts and businesses should be considered as part of its borrowing, potentially circumventing borrowing limits. According to the defendant, the plaintiff has previously exceeded borrowing limits by INR 14,479 crores, contradicting the plaintiff’s claim of underutilizing borrowing by INR 2,941.82 crores until the fiscal year 2022-2023.
The defendant’s arguments are grounded in the regulations outlined in the report of the 14th Financial Commission, which stipulates that if a State over-borrows in a year, the excess amount will be deducted from its borrowing limit in the subsequent fiscal year. It is argued by the defendant that the financial strain and outstanding dues of the Kerala State are a result of its financial mismanagement rather than solely the consequences of the Union’s borrowing regulations.
Furthermore, the defendant contends that any excessive borrowing in one fiscal year should be acknowledged and adjusted for in the following year. The defendant argues that granting further borrowing leeway to the State could potentially endanger and undermine the financial well-being of the country.
LEGAL PROVISIONS
Article 131: The original jurisdiction of the Supreme court.
Article 293 of the Constitution of India, which provides: Borrowing by States —
(1) Subject to the provisions of this article, the executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits, if any, as may from time to time be fixed by the Legislature of such State by law and to the giving of guarantees within such limits, if any, as may be so fixed.
(2) The Government of India may, subject to such conditions as may be laid down by or under any law made by Parliament, make loans to any State or, so long as any limits fixed under article 292 are not exceeded, give guarantees in respect of loans raised by any State, and any sums required for the purpose of making such loans shall be charged on the Consolidated Fund of India.
(3) A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India or by its predecessor Government.
(4) A consent under clause (3) may be granted subject to such conditions, if any, as the Government of India may think fit to impose.
ISSUE –
- Can the Plaintiff-State receive an interim injunction while constitutional questions concerning financial management and borrowing restrictions are pending?
- Is the Plaintiff-State experiencing financial hardship due to alleged mismanagement by the Union, warranting urgent relief?
- To what extent can the court engage in Judicial Review of fiscal policies that seemingly conflict with the essence of Article 293 of the Constitution?
- Does Article 293(3) of the Constitution encompass borrowing by government-owned businesses and debts from the Public Account?
- Is fiscal decentralization a component of Indian Federalism? Do the Defendant’s actions potentially breach Article 14 of the Constitution by exhibiting ‘manifest arbitrariness’?
COURT’S ANALYSIS AND JUDGEMENT
The Court examined the arguments presented by both parties and observed that the case raised significant constitutional questions requiring authoritative interpretation. It referred the case to a five-judge bench for further deliberation.
Regarding the interim relief sought by Kerala, the Court applied the Triple-Test principles. While Kerala failed to establish a prima facie case for under-utilization of borrowing space, the Court found that the balance of convenience favoured denying the relief. The Court noted that Kerala had already received substantial borrowing concessions during the proceedings.
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Judgement Reviewed by – Chiraag K A
