Kerala Moves Supreme Court Against Centre; Accuses Of Damaging Economy, Violating Financial Federalism

Kerala has lodged a case in the Supreme Court, alleging that the Centre has transgressed the federal governance structure and inflicted "serious harm to the economy of a small state with scarce resources" by meddling in its financial affairs, The Hindu reported.

The lawsuit asserted that within a federal governance structure, a State possesses the sole authority to control its finances via the formulation and administration of its budget and loans.

Advocate CK Sasi, representing the State, argued that the Centre's recent activities, legislative changes, and executive orders appear to be deliberately designed to drive Kerala into extreme poverty.

The Central government has placed a Net Borrowing Ceiling (NBC) on Kerala, restricting its capacity to borrow from all sources, including the open market.

This includes deductions made by the Centre for borrowings by state-owned enterprises, particularly when the principal and/or interest is paid from the budget or when these borrowings are used to fund state-announced schemes. Additionally, the Central government has set conditions on Kerala for obtaining loans from foreign sources.

The State claimed that the alterations to the Fiscal Responsibility and Budget Management Act 2003 were a clear infringement on the state's legislative jurisdiction. This is because 'Public debt of the State' is an item that solely belongs to the State List in the Seventh Schedule under Article 246 of the Constitution.

The modifications infringed upon "financial federalism," establishing unconstitutional restrictions and obstacles that hindered the State's ability to manage and borrow its own funds.

The Centre's actions have intruded upon Kerala's exclusive constitutional authority to not only "define" its yearly budget, but also to seek legislative approval for fund allocation. This has undermined Kerala's comprehensive ability to handle its public debt and account, as well as the State's Consolidated Fund.

Moreover, it has affected Kerala's power to establish and operate State-owned enterprises, make laws regarding its borrowings, and secure loans using its Consolidated Fund. Kerala announced that the Central government's directives have led to a severe crisis in the functioning of the state's budget.

“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 said.
Kerala reported that it had already experienced a total expenditure loss or resource shortfall of Rs 1,07,513.09 crores during the fiscal years from 2016 to 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," the suit asserted.

It added, "These dues have accumulated over the years because of financial constraints due to the imposition of borrowing ceiling by the Union… As on 31 October 2023, Rs 26,226 crore is imminently and urgently required in order for the Plaintiff State to avert the impending grave financial crisis."

The State anticipates that its economy may suffer a net loss ranging from Rs 2 to 3 lakh crore over the forthcoming five years.

The lawsuit highlighted that if the harm isn't avoided, the State, burdened by limited resources, may take decades to bounce back.