Kerala has moved the top court against the centre lowering its debt ceiling. The centre says the state is borrowing only for pensions and salaries, not infrastructure
By Vikram L Kilpady
The ongoing hearings in the Supreme Court of a suit filed by the Kerala government against the centre are in the spotlight after the apex court suggested the two parties talk it out. The talks, however, were not successful, just like previous attempts at dialogue, leading to the first-ever suit between a state and the centre over money.
The Kerala government, the Left Democratic Front led by Chief Minister Pinarayi Vijayan, has charged the centre with fiddling with fiscal federalism by amending laws to limit the state’s borrowing capacity. The centre refuted the charge levelled against it and instead blamed Kerala for mismanagement and extravagance.
In its petition in the Supreme Court, Kerala said the centre had impinged upon its fiscal autonomy by amending the Fiscal Responsibility and Budget Management Act (FRBM), 2003, to curtail its borrowing limit. The centre last amended the Act in 2022 to “reduce the fiscal deficit to below 4.5% of GDP by 2025-26”. The FRBM Act is the umbrella under which all transactions between the centre and state governments are carried out. The Act pushes for the centre to be responsible for better fiscal management and macro-economic stability of the country.
The Kerala petition said the centre amended the FRBM Act provisions in May and August last year to prune the state’s borrowing limit from Rs 32,422 crore to Rs 15,390 crore. Kerala, it said, was facing an impending financial crisis and sought the lifting of curbs to raise Rs 26,000 crore in borrowings. The two central amendments ended up encroaching on the legislative domain of the Kerala government, as the Seventh Schedule lists state public debt as a state subject under Article 246 of the Constitution, the plea said.
The fiscal autonomy granted to the states under Article 293 of the Constitution makes it incumbent on them to borrow only from within the territory of India, on guarantee from the Consolidated Fund of the State. The extent to which a state can borrow is laid out in the states’ respective fiscal responsibility Acts.
In the Rajya Sabha, Finance Minister Nirmala Sitharaman answered a question raised by CPM MP John Brittas, who asked for the details on the net borrowing limit fixed for Kerala for financial year 2023-24. Sitharaman said the net borrowing ceiling for states, including Kerala, for 2023-24 has been set at 3% of the Gross State Domestic Product (GSDP), as per the 15th Finance Commission recommendations. She added that the ceiling arrived at for Kerala was Rs 32,442 crore for the period.
It wasn’t just Kerala, the centre said, as it had cut borrowing limits of Punjab, Himachal Pradesh and Telangana. It surely must be a coincidence that all of them are states not ruled by the BJP.
The net borrowing limit was set to be 3% of GSDP under the FRBM Act, but it was increased marginally to 4-5% during the lockdowns that followed the Covid pandemic. The shortfall in revenues and rising expenditure during this period drove the hike. The limit was then brought down from 4% of GSDP in 2021-22 to 3.5% in 22-23 to 3% from 23-24 to 25-26.
Another observation made by the Commission was that Kerala had failed in limiting its fiscal deficit to 3% over the past decade and was a highly debt stressed state. The Commission noted that the state had begun borrowing to foot its revenue expenses, like salaries and pensions, so much so that the ratio of its Revenue Deficit to its Fiscal Deficit was astronomically high at 65%. As is obvious, whatever the state government was borrowing was going towards meeting salaries and pensions payment and was not being utilised for infrastructure.
The lack of funds in the Kerala treasury came to light when a retired transport corporation employee moved the High Court saying his pension was put on hold. That’s when the state’s chief secretary told the Court about the financial crisis plaguing God’s Own Country that had blocked routine work. Soon after, the treasury halted processing bills over Rs 1 lakh, barring salaries and pensions. Kerala Finance Minister KN Balagopal’s successive visits to Delhi didn’t work the magic required.
In a recent Supreme Court hearing, the bench of Justices Surya Kant and KV Vishwanathan asked the centre not to insist on asking the state to withdraw the suit it had filed. The bench said it would like to settle if at all such a suit can be maintained. Justice Kant said the centre can impose any other condition except the withdrawal of the suit before sanctioning the additional Rs 13,608 crore Kerala wanted. Justice Vishwanathan added the centre can ask the state to withdraw the suit since it was a constitutional right under Article 131. Justice Kant also noted the centre must be concerned with the state’s fiscal management since it ultimately impacted the country’s economy.
The judge said the centre’s objection that the courts need not look into fiscal management between centre and states can be construed as a good preliminary objection. But only the court can rule on that aspect, Justice Kant said, before noting that this was the first suit over such issues. Attorney General R Venkataramani said the immediate question that needed answering was whether Kerala had the right under Article 131 to institute the suit. Additional Solicitor General (ASG) N Venkataraman said it will open a Pandora’s Box of suits from each state, which would be judicially unmanageable.
Senior Advocate Kapil Sibal, appearing for Kerala, countered that the centre had borrowed over Rs 8 lakh crore this financial year. ASG Venkataraman said the centre and state borrowings cannot be compared at all. He said the centre’s borrowing for 5.8% fiscal deficit already comprised 2.5% for state-wise allocation and central schemes. When compared to central borrowing, Kerala, he said, had a high outgo towards salaries, pensions and services. He said the centre was willing to consent to release Rs 13,608 crore until the suit was settled.
After talks between the centre and Kerala didn’t make headway, the bench asked the centre to relax borrowing limits for the state for the current financial year before March 31 as a one-time measure. The apex court said more rigid conditions can be imposed on the state for the next financial year, taking into account this special exemption.
ASG Venkataraman noted how the state wanted a bailout package of Rs 25,000 crore which the centre refused. It was because, he said, the budgeted expenditure was 6% and the bailout package sought was 103%, some 15 times more. He added that some states move courts and get such relief, while other states don’t. The country will thus be divided into states that come to court and those that don’t.
The centre’s insistence on Kerala withdrawing the suit before borrowing money drew the ire of the state government. Balagopal said the demand was highly disappointing and was against fiscal federalism. He said the centre was willing to release some money as soon as the case was withdrawn. The state government filed the case to get the funds which are rightfully Kerala’s, the minister said.
The state government finally began releasing salaries and pensions to government employees in the first week of March. The government has not been able to assure its employees over how long the present stalemate will continue.
Further, Kerala has also supported the demands of Karnataka and Tamil Nadu for a bigger share of the direct and indirect tax collections. The two Kerala neighbours have been saying tax money mopped up from their people is being used to fund welfare schemes in BJP-ruled states, particularly Uttar Pradesh. Kerala has also raised several delays in disbursal of GST share.
The state’s importance in the political scheme of things is not to be underrated as the country readies for the 2024 Lok Sabha elections. Though the Left has a vice-like grip on discourse and grassroots support at the state level, the BJP is intent on making an all-out effort to overturn the situation.
The clashes between the state government and Governor Arif Mohammed Khan, who recently sacked two vice-chancellors
for their appointment against UGC norms and suspended one over a suspected ragging death, have been as regular as clockwork. The government has consistently accused Khan of acting on the behest of the centre.
Among the 195-strong list announced by the BJP in its first candidate list for the Lok Sabha elections, 12 candidates were declared for 12 LS constituencies among Kerala’s total 20. These included a Muslim candidate from Malappuram, a predominantly Muslim district, which some say is a first. That in effect marks the ruling party’s focus on the state which has been vocal in calling out the centre over several issues.
The Supreme Court may have suggested a one-time exception for Kerala to weather the crisis. The crisis is, however, here to stay until fiscal strictures are met.