Kerala government, on Wednesday, March 13, refused the Union Government’s proposal that it would provide an additional borrowing of Rs 5,000 crore as a one-time measure subject to stringent conditions. The Union government informed the Supreme Court that it would give the money but impose stricter conditions for the next financial year, after the court asked the Union Government to consider easing Kerala’s borrowing limit for this year, before March 31, 2024, as a one-time measure. A two-judge bench of Justices Surya Kant and KV Viswanathan heard the matter.

Additional Solicitor General N Venkataraman told the bench that Rs 5000 crore can be allowed, and it will be deducted from net borrowing ceiling for the first nine months of the next financial year. He added that this would be done subject to certain conditions. According to LiveLaw, the conditions imposed by the Union government are:

> The amount will be deducted from the net borrowing ceiling of Kerala in the first nine months of the next financial year, ie 2024 - 2025. 

> No spontaneous (ad hoc) borrowing will be allowed for the 2024-25 fiscal year.

> The Union government will consent for borrowing in 2024-25 will only be given after the state government submits receipt of prescribed information and documents.

> For the next fiscal year, the state government’s eligibility to borrow money will be calculated after deducting the Rs 5,000 crores. The Union government will consent for borrowing to Kerala in the first nine months on a quarterly basis for up to 25% of the eligibility amount.

> The government of Kerala should submit its 'plan B', which it will announce in its budget for 2024-25, for raising resources and improving the financial position of the state. It should also put this plan into action before grant of borrowing consent for the last quarter of 2024-25.

Senior Advocate Kapil Sibal, who appeared on behalf of the Kerala government, refused the proposal of the Union government. He argued that this concession was based on a presumption that the State was not entitled to any additional borrowing and that the Union government was trying to impose conditions which would control the State's expenditures, which would violate the principles of federalism. "Rs 5000 crores will not take us anywhere, we need at least 10,000 crores. They are saying this on the assumption that the suit is liable to be dismissed," Sibal had said. 

While the court asked the Kerala state government to accept the Rs 5000 crore and persuade the Union to grant more, advocate Sibal said that it came with stricter conditions which is equivalent to controlling the state’s budgets. The bench has adjourned the case for hearing on March 21.

Last week, the Union had denied Kerala's request to borrow Rs 19,351 crore. In the previous hearing, the Court had convinced the Union to allow Kerala to borrow an additional Rs 13,608 crores without requiring the state to withdraw its lawsuit against the Union regarding borrowing limits. The Union government had informed the court that it was willing to consider allowing Kerala to borrow additional money of Rs 13,608 crore in view of its current precarious financial situation, but only if the state government withdraws the case against the Union government. 

In December 2023, Kerala government filed the petition against the Union government’s decision to limit the amount of additional money the state can borrow. For the current financial year, the Union government fixed a borrowing limit of Rs 47,762.58 crore for Kerala. Out of this, Rs 29,136.71 crore is open market borrowing and the remainder from other sources. The state requested the Union to allow additional borrowing, and stated that it required Rs 26,000 crore to meet its financial obligations. Kerala is the second state after Punjab to move the apex court in relation to a financial dispute with the Union government.

The Kerala government also alleged that this act of the Union government violated the principles of fiscal federalism. The state’s petition also alleged that the Union government’s action could lead to a financial crisis. On February 8, the Kerala government under the leadership of Chief Minister Pinarayi Vijayan had organised a protest in New Delhi against the Union government’s financial curbs on southern states, alleging that they are eroding democracy and federalism.

Read: 'Union eating into states' resources’: Full text of Pinarayi speech at Delhi protest

Also Read: Kerala’s deepening fiscal crisis and the way ahead