The Supreme Court on Monday referred to a Constitution Bench the question raised by Kerala whether a State has an “enforceable right” to raise its borrowing limits from the Union government and other sources.
The court wants a five-judge Bench to decide important questions of law, including whether “fiscal decentralisation” was an aspect of Indian federalism and if Central regulations fixing net borrowing ceilings on States were a violation of the principles of federalism.
The court raised the issue if financial restrictions introduced by the Centre had meted out a differential treatment to Kerala compared to other States.
The Division Bench of Justices Surya Kant and K.V. Viswanathan also sought the Constitution Bench to examine if the borrowing restrictions of the Centre were in conflict with the role assigned to the Reserve Bank of India as the “public debt manager”.
Finally, the two-judge Bench framed the question whether it was mandatory for the Centre to have prior consultation with States for giving effect to the recommendations of the Finance Commission.
The reference came on the basis of an original suit filed by Kerala accusing the Union government of arbitrarily restraining its borrowing limits, due to which the State is skirting on the brink of a financial emergency, unable to pay salaries, pensions and fulfill its other essential financial commitments.
However, the Bench of Justices Surya Kant and K.V. Viswanathan was skeptical about Kerala’s prowess to use its funds wisely. It refused to pass any judicial order directing the Union government to lift the net borrowing ceiling for Kerala or enable the State to borrow ₹26,226 crore on an immediate basis.
‘Bad precedent’
“If the State has essentially created financial hardship because of its own financial mismanagement, such hardship cannot be held to be an irreparable injury that would necessitate an interim relief against the Union… it might set a bad precedent in law that would enable the States to flout fiscal policies and still successfully claim additional borrowings,” the court noted.
The Bench observed that the Centre had already allowed a “substantial relief” of ₹13,608 crore to the State for it to tide over the immediate crisis.
The court noted that the “balance of convenience” lay in favour of the Centre for now as it had already given the additional amount to the State.
The court however also highlighted its disapproval of the Centre’s conduct during the hearing of the case when it had pressed the State to withdraw its suit in return for financial help.
The court said the order was ad interim in nature and the larger questions of law raised in the suit would be examined by the five-judge Bench, which the Chief Justice of India would constitute later on.
The Division Bench noted that there was a vacuum in law concerning Article 293 of the Constitution, which dealt with the financial borrowings by States.
Kerala had approached the apex court arguing that the Centre’s shackles on the State’s borrowing powers was an attack on federalism and a catalyst to bring about a breakdown of the constitutional machinery in the State. The State had argued that the borrowing limits ought to be fixed by the States.
The Union had argued that the State had a long history of fiscal deficit, by which its expenditure was in far excess of its income.
Also Read | The Finance Commission and public finance in Kerala
