The Hon'ble Supreme Court of India referred a matter pertaining to the ceiling on net borrowing by Kerala State to a 5-judge Constitution Bench. The Division Bench consisting of Hon’ble Justices Surya Kant and KV Viswanathan further refused to grant ad-interim injunction in Kerala’s favour due to its inability to prove a prima facie case against the Union of India.
Brief Facts:
The State of Kerala instituted the instant suit against the Union of India under Article 131 of the Constitution of India challenging the Amendment Act No. 13 of 2018 for the Central Government restricting the aggregate debt of the Central Government and the State Governments within 60% of the gross domestic product by the end of Financial Year 2024-25. It further challenged the two letters – Letter No. 40(1)/PF-S/2023-24 imposing a ‘Net Borrowing Ceiling’, quantified at 3% of the projected Gross State Domestic Product (GSDP) which came to be Rs 32,442 crores and Letter No. 40(12)/PF-S/2023-24/OMB-52 for the Union consenting to Kerala state to raise open market borrowing allowed for Rs 21,852 crores for FY 2023-24.
Contentions of the Petitioner:
It was alleged that through impugned actions, the Union of India exceeded its power under Article 293 of the Constitution regarding Borrowing by States. It was further claimed that conditions could be imposed only on loans sought from the Central Government and that liabilities arising out of Public Accounts and State-Owned Enterprises could not be included in the State’s borrowings.
The State also sought an interim injunction to mandate the Union of India to restore the pre-existing position before the said ceiling was imposed and to enable borrowing of Rs 26,226 crores by Kerala State on an immediate basis for paying off dues arising out of various budgetary obligations.
Contentions of the Respondent:
It was contended on behalf of the Union that management of public finance was a national issue which empowered the Union of India to regulate all the borrowings of the Kerala State to maintain the fiscal health of the country. It was submitted that the liabilities arising out of Public Accounts and State-Owned enterprises could be included in State borrowings and that the pending dues arose due to fiscal mismanagement by Kerala State as against the regulation of borrowing by the Union of India. Regarding under-utilized borrowing space from previous years, the Union claimed it to be erroneous while stating that the over-borrowing done in an FY must be adjusted against the borrowing amount of the next FYs.
Observations of the Court:
The Court analyzed the contentions and remarked that more than one substantial questions of Constitutional interpretation were raised in the instant matter, regarding the expression contained in Article 131 of the Constitution; question of State’s vested and enforceable right to raise borrowing from Union Govt or other sources and the extent of regulation by the Union; inclusion of borrowing by State-Owned Enterprises and liabilities arising out of Public Account under Article 293(3) of Constitution; and the scope of judicial review exercisable by the Supreme Court in respect to a fiscal policy in conflict with the object and spirit of Article 293 of Constitution.
While taking note of the fact that Article 293 of the Constitution has not been so far the subject to any authoritative interpretation by the Supreme Court, the Court opined that the aforesaid aspects squarely fell within the ambit of Article 145(3) of the Constitution. Therefore, the Court referred the said questions to be decided by the 5-Judge Constitution Bench of the Supreme Court.
The Court further noted that apart from merits, various questions of significant importance impacting the Federal Structure of Governance arose for consideration, such as whether fiscal decentralization was an aspect of Indian Federalism, and whether the Union’s actions in the instant matter violated such principles, or Article 14 of the Constitution for ‘manifest arbitrariness’ for differential treatment meted out to Kerala as against other States. The Court also raised concerns about past practices between Kerala state and the Union, the question of estoppel, and also about whether the restrictions imposed by the Union conflicted with the role assigned to the Reserve Bank of India as the public debt manager of Kerala State. The Court lastly questioned whether there should be a mandate to have prior consultation with States for giving effect to the recommendations of the Finance Commission.
While adverting to the scope for any ad-interim injunction, the Court referred to the triple test requiring a prima facie case, balance of convenience and irreparable injury. The Court delineated prohibitory and mandatory injunctions and highlighted that Kerala State sought mandatory injunction because instead of arguing that Union should refrain from imposing a Net Borrowing Ceiling during the next FY, it applied for a backward-looking injunction to undo the imposition of the Net Borrowing Ceiling and restoration of pre-existing position before such ceiling was imposed. Therefore, the Court explained that the State was required to meet a higher standard for a triple test of interim relief.
The Court looked at the prima facie aspect and accepted the argument on behalf of the Union that “where there is over-utilization of the borrowing limit in the previous year, to the extent of over-borrowing, deductions are permissible in the succeeding year, even beyond the award period of the 14th Finance Commission”, and explained that the said matter was to be decided in the suit due to State’s failure to demonstrate that there was fiscal space to borrow even after adjusting the over-borrowings of the previous year. The Court further compared the ‘extreme financial hardship on account of Kerala’s pending dues’ and ‘grave consequences on the fiscal health of the country’ and observed that “it seems to us that the mischief that is likely to ensue in the event of granting the interim relief, will be far greater than rejecting the same” and concluded that the balance of convenience lies in Union’s favour.
The Court said that the State sought to equate ‘financial hardship’ with ‘irreparable injury’ and prima facie observed that ‘monetary damage’ was not irreparable loss since pending claims could be settled later. The Court hinted that the Union had assuaged Kerala State’s concern to some extent to bail out the State from the current crisis, and remarked that the State had secured substantial relief during the pendency of the instant application.
The decision of the Court:
The Court referred the matter to be considered by a 5-judge Constitution Bench to be constituted by the Hon’ble Chief Justice of India.
While considering the three tests for interim injunction and discussing all three in detail, the Court found that Kerala State was not entitled to the relief prayed for.
Case Title: State of Kerala v. Union of India
Coram: Hon’ble Mr. Justice Surya Kant and Hon’ble Mr. Justice KV Viswanathan
Case No.: Original Suit No. 1 of 2024 - I.A. No. 6149 of 2024
Advocate for the Petitioners: Sr. Adv. Mr. Kapil Sibal, AOR Mr. C.K. Sasi
Advocate for the Respondents: Attorney General for India Mr. R Venkatramani, A.S.G. Mr. N Venkatraman, AOR Mr. Raj Bahadur Yadav, Adv. Mr. Sonali Jain, Adv. Mr. Chitvan Singhal, Adv. Mr. Raman Yadav, Adv. Mr. Kartikay Aggarwal, Adv. Mr. Abhishek Kumar Pandey, Adv. Ms. Ameyvikrama Thanvi, Adv. Mr. Mukesh Kumar Singh
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