Kerala is one of the most financially unhealthy States in the country, Centre tells SC

Centre blames the State government’s lack of proper management of public finances for its poor fiscal condition

A view of the Supreme Court of India in New Delhi. File | Photo Credit: R.V. Moorthy

The Centre has told the Supreme Court that Kerala was “one of the most financially unhealthy States” and debts run by States affect the credit rating of the whole country.

A note submitted by Attorney General R. Venkataramani in the apex court said the “fiscal edifice of Kerala has been diagnosed with several cracks”.

The Centre said the poor financial indicators of Kerala point to a “lack of proper management of its public finances”.

The Union government said “substantial financial resources” were provided to the Kerala government from 2020-21 to 2023-24 over and above the amount recommended by the 15th Finance Commission. One of these was the payment of ₹14,505 crore as “back-to-back loan to meet GST compensation shortfall”.

“Despite the devolution of substantial resources from central taxes and duties, highest share of post-devolution revenue deficit grant, financial support over and above the Finance Commission’s recommendations and transfer of funds under centrally sponsored schemes, any financial stress that the Kerala government is facing is purely due to its own financial mismanagement,” the Centre said in the 46-page note.

The Centre said a State that indulged in “reckless borrowing to finance unproductive expenditure and poorly targetted subsidies” was courting trouble. “Increase in State debts as a consequence of high borrowing will reduce availability of development funds, impoverishment of people and loss of State income, hence, also the loss of national income.”

The note is a response to an original suit filed by the State of Kerala against the Centre for violating the federal structure of governance and causing “severe damage to the economy of a small State with meagre resources”.

The State urged the court to protect the federal system of governance in which the State has the exclusive power to regulate its finances through the preparation and management of its budget and borrowings. Kerala said recent actions, like imposing a Net Borrowing Ceiling in an arbitrary manner, were calculated to reduce it to a “state of penury”.

In response, the Centre referred to three Finance Commission reports which had highlighted the deteriorating debt situation of the State.

“The Reserve Bank of India has also categorised Kerala among the five highly stressed States with high indebtedness requiring urgent corrective measures. The report said Kerala, Rajasthan and West Bengal are projected to exceed the debt-GSDP (Gross State Domestic Product) ratio of 35% by 2026-27,” the Centre submitted.