"Kerala one of the most financially unhealthy states, facing acute fiscal crisis", Supreme Court told

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"Declare and hold that the Defendant Union has no right, power or authority to regulate, interfere with, fetter, limit and/ or impose any conditions on the borrowings by the Plaintiff State including under Article 293(3) and Article 293(4) of the Constitution or otherwise, except for conditions that may be imposed in respect of specific loans of the Plaintiff State availed from the Defendant Union of India or raised on the security of guarantees issued by the Defendant Union of India, as provided for under Article 293(2) of the Constitution...", the plea by Kerala states.

The Attorney General has filed a note in the State of Kerala's plea against the Union government's alleged interference with its finances.

Kerala had instituted an Original Suit under Article 131 of the Constitution of India against the Union of India invoking the original jurisdiction of the Supreme Court.

In a detailed note filed by the AG, the 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.

"Despite the devolution of substantial resources from Central taxes and duties, highest share of post devolution Revenue Deficit Grant, financial support extended by the Union Government over and above the recommendations of the Finance Commission and substantial transfer of resources to the State Government under the Centrally Sponsored Schemes, any financial stress that the Government of Kerala is facing is purely due to its own financial mismanagement", the AG's note adds.

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.

In this backdrop a declaration has been sought saying that the State enjoys complete, exclusive and independent plenary 330 powers to regulate and manage its public debt, Public Account and liabilities and borrowings under Articles 199, 202, 203, 246, 266 and other provisions of the Constitution.

Case Title: State of Kerala vs. Union of India