Centre is nudging Kerala towards a financial crisis, says State in Supreme Court

The State in a suit contended that recent actions, amendments and executive orders by the Centre were calculated to reduce Kerala to a state of penury.

December 13, 2023 01:43 pm | Updated 01:43 pm IST - NEW DELHI

Kerala said in a suit filed in the Supreme Court that a State, in a federal system of governance, had the exclusive power to regulate its finance through preparation and management of its budget and borrowings.

Kerala said in a suit filed in the Supreme Court that a State, in a federal system of governance, had the exclusive power to regulate its finance through preparation and management of its budget and borrowings. | Photo Credit: Shiv Kumar Pushpakar

Kerala has filed a suit in the Supreme Court accusing the Centre of violating the federal structure of governance and causing “severe damage to the economy of a small State with meagre resources” by interfering with its finances.

The suit said a State, in a federal system of governance, had the exclusive power to regulate its finance through preparation and management of its budget and borrowings.

The State, represented by advocate C.K. Sasi, contended that recent actions, amendments and executive orders by the Centre were calculated to reduce Kerala to a state of penury.

Net Borrowing Ceiling

Kerala said the Centre had imposed a Net Borrowing Ceiling (NBC) on the State in a way to limit its borrowings from all sources, including the open market. The Centre had deducted borrowings by State-owned enterprises where the principal and/or interest was serviced out of the budget or where such borrowings were made to finance schemes announced by the State. The Centre had also imposed conditions on the State taking loans from outside India.

The State said amendments made to the Fiscal Responsibility and Budget Management Act, 2003 had amounted to a blatant encroachment into the “legislative domain of the State as ‘Public debt of the State’ was an item exclusively in the State List in the Seventh Schedule under Article 246 of the Constitution”.

The amendments had violated “fiscal federalism” by creating unconstitutional limits and impediments on the State to borrow and regulate its own finances.

The actions of the Centre had interfered with the exclusive constitutional power of Kerala to even “define” its annual budget and seek approval of the Legislature for allocation of funds. It had handicapped the plenary power of Kerala to manage its public debt, public account and the Consolidated Fund of the State; create and run State-owned enterprises; legislate on its borrowings; and borrow on the security of its Consolidated Fund.

Kerala said the Centre’s orders had “brought the operation of the State’s budget to a grave crisis”.

“Unless the Net Borrowing Ceiling, as fixed by the Kerala Fiscal Responsibility Act, 2003, based on which the State budget has been drawn up and approved by the Legislature is restored, the State is legitimately apprehensive that its treasury operations will be halted or starkly curtailed. This is a dire situation looming ahead and the immediate consequences to the State will be catastrophic,” the suit highlighted.

Kerala said it had already suffered a cumulative expenditure loss or resource deficiency of ₹1,07,513.09 crores over fiscal year period between 2016-2023.

“The inability to fulfill the commitments in its annual budgets has resulted in huge arrears that the State owes by way of welfare schemes to the people of the State, particularly the poor and the vulnerable, various beneficiary groups, the employees of the State government, its pensioners and dues to its State-Owned Enterprises… These dues have accumulated over the years because of financial constraints due to the imposition of borrowing ceiling by the Union… As on October 31, 2023, ₹26,226 crore is imminently and urgently required in order for the Plaintiff State to avert the impending grave financial crisis,” the suit said.

It is estimated that over a period of the next five years, the net loss sustained by State’s economy could be as high as ₹2 to 3 lakh crore, the State said.

“If the damage is not prevented, the State, with its meagre resources, will not be able to recover from this for decades,” the suit noted.

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