State borrowing limits: Ready for dialogue with Kerala, Centre informs SC

The Union government informed the Supreme Court on Tuesday that it is prepared to engage with the Kerala government on the limits the Centre imposed on the state’s borrowing powers.

Senior advocate Kapil Sibal, appearing for the Kerala government, told the court that a state delegation would fly to New Delhi on Wednesday for a dialogue with the Centre. 

This development came after a two-judge bench comprising Justice Surya Kant and Justice K. V. Viswanathan suggested that the finance secretary of Kerala meet with the Union finance minister to resolve the matter. 

The discussion arose during a hearing of a suit filed  by the Kerala government challenging the Centre’s decision to impose a ceiling on its borrowing amount. Kerala argued that this restriction resulted in a severe crisis in its budget operations and violated the principles of fiscal federalism.

The Kerala government’s suit contends that the Union finance ministry, through two letters issued by its public finance-state division on 27 March and 11 August, as well as amendments made to Section 4 of the Fiscal Responsibility and Budget Management Act, 2003, imposed a net borrowing ceiling on Kerala, restricting its borrowings from all sources, including from the open market. 

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In response to the suit, the Union government, through the Attorney General for India, filed a written note in the Supreme Court stating that any financial stress faced by the Kerala government was primarily due to poor financial mismanagement.

According to the Union government, “substantial financial resources” were provided to the Kerala government from financial years 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 a “back-to-back loan to meet GST compensation shortfall”.

The Union government also said any state defaulting on debt servicing could create reputation issues and a domino effect, threatening India’s financial stability. The Attorney General emphasized that all states require permission from the Centre to borrow from any source. This permission is granted while considering the overall objectives of macroeconomic stability for the country as a whole, and the borrowing limits are fixed in a non-discriminatory and transparent manner as guided by the recommendations of the Finance Commission.

It stressed that public finance management is a national issue, as state debt affects the credit rating of the country, and that reckless borrowing by states to finance unproductive expenditure could crowd out private borrowing from the market.

In December, Union finance minister Nirmala Sitharaman, in a reply in Parliament, clarified there was no proposal to relax the existing terms for borrowing capacity of state governments, including Kerala, for 2023-24. 

Sitharaman said the Centre applies a common yardstick while fixing the annual borrowing limit of all state governments under Article 293(3) of the Constitution, and that it is guided by the recommendations of the Finance Commission.