The ongoing dispute between the Union government and the Kerala state government regarding borrowing limits has taken a significant turn as the Union government informed the Supreme Court of its readiness to engage in dialogue with Kerala over the issue.
Senior advocate Kapil Sibal, representing the Kerala government, informed the court that a state delegation would travel to New Delhi on Wednesday for discussions with the Centre. This development follows a suggestion from a two-judge bench comprising Justice Surya Kant and Justice K. V. Viswanathan, proposing a meeting between the finance secretary of Kerala and the Union finance minister to resolve the matter amicably.
The crux of the dispute lies in the Kerala government’s challenge to the Centre’s decision to impose a ceiling on its borrowing amount. Kerala argues that this restriction has led to a severe crisis in its budget operations and violates the principles of fiscal federalism.
The Kerala government’s suit contends that the Union finance ministry, through two letters issued by its public finance-state division on 27 March and 11 August, as well as amendments made to Section 4 of the Fiscal Responsibility and Budget Management Act, 2003, imposed a net borrowing ceiling on Kerala. This restriction applies to borrowings from all sources, including the open market.
In response to Kerala’s suit, the Union government, represented by the Attorney General for India, filed a written note in the Supreme Court. The note states that any financial stress faced by the Kerala government is primarily due to poor financial mismanagement. It highlights the substantial financial resources provided to Kerala from financial years 2020-21 to 2023-24, exceeding the amount recommended by the 15th Finance Commission.
One significant allocation mentioned is the payment of ₹14,505 crore as a “back-to-back loan to meet GST compensation shortfall.” The Union government asserts that any state defaulting on debt servicing could have reputational repercussions and threaten India’s financial stability.
The Attorney General emphasized that all states require permission from the Centre to borrow from any source. This permission is granted while considering the overall objectives of macroeconomic stability for the country, and borrowing limits are fixed transparently and non-discriminatively, guided by the recommendations of the Finance Commission.
Furthermore, the Union government stressed that public finance management is a national issue, as state debt affects the credit rating of the country. Reckless borrowing by states to finance unproductive expenditure could crowd out private borrowing from the market.
In December, Union Finance Minister Nirmala Sitharaman clarified in Parliament that there was no proposal to relax the existing terms for the borrowing capacity of state governments, including Kerala, for 2023-24. She reiterated that the Centre applies a common yardstick while fixing the annual borrowing limit of all state governments under Article 293(3) of the Constitution, guided by the recommendations of the Finance Commission.
The dispute underscores broader tensions between the Union government and state governments regarding fiscal autonomy and federal principles. Kerala’s challenge to the borrowing limits imposed by the Centre reflects concerns about the centralization of financial powers and its impact on state finances.
The Supreme Court’s intervention in facilitating dialogue between Kerala and the Union government demonstrates the judiciary’s role in resolving intergovernmental disputes and upholding principles of cooperative federalism. It remains to be seen how the discussions between the two parties unfold and whether a mutually acceptable solution can be reached to address Kerala’s concerns while ensuring macroeconomic stability and fiscal discipline at the national level.
