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Synopsis

A division bench of the Supreme Court has been informed by Attorney General R Venkataramani that Central Government was open to talks with the Kerala government on the issue of Borrowing Ceiling imposed on the State by the Centre.

Kerala government also agreed to send a delegation to have a face-to-face with representatives of the central government.

Yesterday, a bench of Justices Surya Kant and KV Viswanathan had recommended that the Kerala's Finance secretary should engage in dialogue with the Union Finance Minister to break the deadlock through negotiation.

"Let this not be an empty formality. Only when you think that there is a possibility... then only we will request..", the bench had further observed.

Notably, AG recently filed a note in the State of Kerala's plea against the Union government's alleged interference with its finances.

In said note Supreme Court has been told that Kerala has been one of the most financially unhealthy states whose fiscal edifice has been diagnosed with several cracks. "The 15th Finance Commission designated Kerala to be a “highly debt stressed” State. It observed that Kerala had largely failed to limit its fiscal deficit to 3% of GSDP for almost all of the past decade....The Reserve Bank of India has also categorized Kerala among the five highly stressed States with high indebtedness requiring urgent corrective measures...", the note states.

Court has been further informed that an analysis of financial situation of Kerala has revealed that the State still has poor financial indicators pointing towards a lack of proper management of its public finances.

It has been further stated that debt of States also affects credit rating of the country. "Sovereign ratings are about the creditworthiness of Governments. They provide a marker for investors around the world about the ability and willingness of Governments to repay debt and affect their ability to borrow and the interest rates at which they can borrow from the global markets. A good rating will make the borrowing cheap, and will also attract investments into the country from foreign investors. Institutional investors rely on sovereign ratings to qualify and quantify the general investment atmosphere of a particular country...", the country's senior most law officer has stated.

A division bench of Justices Surya Kant and KV Vishwanathan had issued notice in said plea on January 12, 2024.

Kerala has submitted that the Union has imposed a Net Borrowing Ceiling on the State in the manner deemed fit by it, which limits borrowings from all sources including open market borrowings and by further reducing the Net Borrowing Ceiling by including aspects into the “borrowing” of the State which, otherwise, are not “borrowings” as contemplated under Article 293 of the Constitution.

"If the State is not able to borrow to the extent required based on the budget of the State, the State would not be able to complete its State Plans for the particular financial year. Therefore, it is essential for the progress, prosperity and development of the State and the people of the State that the State is able to exercise its constitutional rights and its borrowings are not impeded in any manner...", the suit states.

Kerala has further challenged the amendment to the Fiscal Responsibility and Budget Management Act, 2003 (Act 39 of 2003) vide the amendment no. 13 of 2018, whereby Centre has substituted Section 4(1) of the Principal Act, inter alia, to newly introduce Clauses (b) and (d) whereby the term "General Government Debt" was added. 

"The Defendant through the Impugned Amendments has encroached into the legislative domain of the Plaintiff State as F “Public Debt of the State” is an item exclusively in the State List in the Seventh Schedule under Article 246 of the Constitution. The Impugned Amendments, which are ultra vires the Constitution would potentially be used to thwart the powers of the Plaintiff State...", court has been told.

Case Title: State of Kerala vs. Union of India