Centre, Kerala spar in Supreme Court as financial aid talks hit an impasse

March 13, 2024 06:37 pm | Updated 07:47 pm IST - NEW DELHI

The bugle has sounded for a legal battle between the Centre and Kerala in the Supreme Court, after the Union government said on March 13 that it could only spare ₹5,000 crore as a one-time measure to avert an immediate financial crisis in the Kerala.

The amount offered by the Union government will not be enough to fulfill Kerala’s most basic financial commitments, including pensions and salaries, senior advocate Kapil Sibal and C.K. Sasi, representing the State, told a Bench of Justices Surya Kant and K.V. Viswanathan.

The Union government also said it would deduct ₹5,000 crore from the State’s net borrowing ceiling in the first nine months of the financial year 2024-2025, and stipulated that the State would not be allowed any “ad-hoc” borrowing in 2024-2025 if it takes the ₹5,000 crore being proffered now.

‘Centre trying to control State finances’

Mr. Sibal said that the Union government’s objective was to simply “strap the State down and control its finances”. Rejecting the Centre’s offer, he said: “We want an absolute minimum of at least ₹10,000 crore. This ₹5,000 crore does not take us anywhere. I will not be able to pay my people.”

The court was hearing an original suit filed by Kerala accusing the Union government of interfering with its borrowing limits and financial affairs in violation of the principle of federalism.

In an earlier hearing, Justice Kant said that the suit was probably the first of its kind in the Supreme Court. The court listed the case to hear arguments for interim relief on March 21.

‘Negotiation over’

The Bench had initially urged the Union and State governments to resolve the issue out of court. However, Wednesday’s hearing saw any hope for an amicable resolution fade away as Additional Solicitor General N. Venkataraman, appearing for the Union government, read from a note detailing the statistical projections and reasons for limiting financial help to Kerala.

“So, the negotiation part is over. You [Union government] have made your position clear. Your note is self-explanatory,” Justice Kant said after the reading.

Mr. Sibal said that it seemed as if the Union government’s note was prepared under the assumption that the State was not entitled to the amounts required to pay its people. “The note assumes that our suit should be dismissed,” he said.

Kerala’s borrowing limits

The note said that Kerala’s projected Gross State Domestic Product (GSDP) for 2024-2025 is estimated at ₹11,19,906 crore. The net borrowing ceiling for Kerala is three percent of its GSDP, which would amount to ₹33,597 crore.

Out of ₹33,597 crore, ₹4,711 crore has to be deducted for off-budget borrowing done by Kerala in 2021-2022. This would reduce the total borrowing limit to ₹28,886 crore. Out of this, 75% — or ₹21,664 crore — can be loaned in the first nine months of 2024-2025.

If Kerala, according to its current demand, wants an advance of ₹15,000 crore before the end of March 2024, its borrowing space for the next financial year would be reduced to ₹6,664 crore, the note explained. “Given the expenditure trend of Kerala, it will be extremely difficult for the State government to.manage its finances with just a borrowing limit of ₹6,664 crore for the first nine months,” Mr. Venkataraman submitted.

Kerala had ploughed through ₹21,852 crore in the first six months of the current financial year 2023-2024, at an average of ₹3,642 crore per month, the Union government said. “So, the State cannot manage with just ₹6,664 crore in the first nine months, with an average spending of ₹740 crore a month. This would cause hardship to its people,” Mr. Venkataraman said, conveying the limitations of the State’s legal right to borrow.