The Kerala-Centre dispute over States’ borrowing powers | Explained Premium

The Supreme Court declines interim relief to Kerala in its suit against the Centre pertaining to cap on borrowing. We explore the issues at stake and what the Court has said

The story so far: The Supreme Court on Monday declined any interim relief to Kerala in its suit seeking that the Union government relax its borrowing restrictions to enable the State to borrow additional funds during the current fiscal year. It also refused to stay the operation of two letters issued by the Union Finance Ministry last year and certain amendments made to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, in 2018 that imposed borrowing cap restrictions on States.

Kerala moved the top Court last year accusing the Union government of arbitrarily imposing a Net Borrowing Ceiling (NBC) on the State, which brought it to the brink of a financial crisis as it could not no longer pay salaries and pensions or fulfil other essential financial commitments.

A bench of Justices Surya Kant and K.V. Viswanathan also referred to a Constitution Bench the larger questions of law raised in the suit, such as whether Kerala had an “enforceable right” under Article 293 of the Constitution to raise its borrowing limits from the Union government and other sources.

The NBC imposes a limitation on borrowings of a State from all sources including open market borrowings. The Union government decided to deduct liabilities arising from the public account of the States to arrive at such a cap. Additionally, borrowings by State-owned enterprises, where the principal and/or interest are serviced out of the Budget or through assignment of taxes, cess or any other State revenue, are also deducted from the NBC.

The NBC for States is fixed at 3% of the Gross State Domestic Product (GSDP) or ₹8,59,988 crore in absolute terms for the Financial Year (FY) 2023-24 as recommended by the 15th Finance Commission. On December 5 last year, Finance Minister Nirmala Sitharaman, while responding to a question raised by CPI(M) MP John Brittas in the Rajya Sabha, clarified that the NBC for Kerala is pegged at ₹32,442 crore for FY 2023-24.

Kerala has opposed the inclusion of debt of State-owned enterprises as its own debt. Infrastructure projects initiated by the State government are funded primarily by the Kerala Infrastructure Investment Fund Board (KIIFB), a statutory body, through extra-budgetary borrowings. Due to the inclusion of the debt of the KIIFB in the NBC, the State has claimed that it is unable to pay salaries and meet expenses for welfare schemes. Notably, no prior Finance Commission has recommended the inclusion of the debt of State-owned enterprises in the NBC.

In November last year, Kerala Chief Secretary V. Venu apprised the Kerala High Court that the State was in a “deep financial crisis” and was finding it difficult to clear the dues of its employees. The Court was hearing a petition filed by a retired KSRTC employee claiming that his pension was on hold.