A) ABSTRACT / HEADNOTE

This case involves a constitutional challenge by the State of Kerala against the Union of India concerning fiscal autonomy and the interpretation of Articles 131 and 293 of the Constitution of India. The State disputes the Union’s imposition of borrowing restrictions, including a Net Borrowing Ceiling applied across various fiscal liabilities. Kerala sought interim relief to enable it to borrow funds, claiming that the Union exceeded its authority under Article 293. The case raises crucial constitutional questions on federal fiscal relations, judicial review, and fiscal decentralization within the Indian federal system. While the Supreme Court referred the substantive issues to a larger Bench, the request for interim relief was denied, emphasizing the triple-test for granting injunctions and the balance of convenience favoring the Union.

Keywords: Borrowing by States, Fiscal Federalism, Article 293, Injunctions, Triple-Test.

B) CASE DETAILS

i. Judgement Cause Title: State of Kerala v. Union of India

ii. Case Number: Original Suit No. 1 of 2024

iii. Judgement Date: 01 April 2024

iv. Court: Supreme Court of India

v. Quorum: Surya Kant and K.V. Viswanathan, JJ.

vi. Author: Justice Surya Kant

vii. Citation: [2024] 4 S.C.R. 13; 2024 INSC 253

viii. Legal Provisions Involved:

• Article 131: Original jurisdiction of the Supreme Court in disputes involving States and the Union.
• Article 293: Borrowing powers of States.
• Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
• Kerala Fiscal Responsibility Act, 2003.

ix. Judgments Overruled by the Case: None explicitly overruled.

x. Case is Related to: Constitutional Law, Fiscal Policy, Federalism, and Public Finance Law.

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The State of Kerala filed this case under Article 131, asserting a federal dispute against the Union of India. At its core lies the contention that the Union overstepped its constitutional powers under Article 293(3) by imposing a Net Borrowing Ceiling, which, according to Kerala, infringes upon its fiscal autonomy. The Union argued that fiscal health is a national issue, and regulating borrowings is essential to maintain economic stability.

Kerala also alleged that previous borrowing restrictions were unduly stringent and sought relief in the form of mandatory injunctions to enable borrowing of INR 26,226 crores for critical financial obligations. The Court, while acknowledging the gravity of the constitutional questions, denied interim relief based on the triple-test criteria.

D) FACTS OF THE CASE

1. Borrowing Restrictions: The Union, through various statutory and administrative mechanisms, imposed a Net Borrowing Ceiling on Kerala, restricting its ability to raise funds through public borrowings and loans.

2. State’s Financial Crisis: Kerala claimed it faced fiscal challenges due to under-utilized borrowing spaces in prior years and required immediate funds to meet liabilities like pensions, dearness allowances, and subsidies.

3. Union’s Justifications: The Union contended that Kerala had over-borrowed in previous years, which necessitated subsequent deductions to maintain fiscal discipline.

4. Application of Finance Commission Recommendations: Both parties relied on recommendations from the 14th and 15th Finance Commissions, but their interpretations on borrowing adjustments and fiscal deficits diverged significantly.

E) LEGAL ISSUES RAISED

1. Does Article 293 grant enforceable rights to States for unrestricted borrowing, and to what extent can the Union regulate these rights?
2. Can liabilities from State-Owned Enterprises and Public Accounts be included under Article 293(3)?
3. What is the scope of judicial review over fiscal policies potentially conflicting with the federal structure?
4. Is fiscal decentralization a protected principle under Indian federalism, and do the restrictions imposed by the Union violate it?
5. Are the Union’s actions violative of Article 14 due to arbitrariness or differential treatment?

F) PETITIONER/APPELLANT’S ARGUMENTS

1. Violation of Article 293: Kerala argued that the Union cannot impose conditions on all borrowings and should limit its regulation to loans directly advanced by the Union.
2. Fiscal Federalism: The imposition of borrowing restrictions undermines fiscal decentralization and federal principles.
3. Past Borrowing Space: Kerala maintained that its under-utilization of borrowing space in previous years justified the additional borrowing request for 2023-24.
4. Irreparable Harm: The State claimed fiscal paralysis due to insufficient funds for critical budgetary obligations, equating this financial hardship to irreparable injury.

G) RESPONDENT’S ARGUMENTS

1. National Fiscal Stability: The Union asserted that the borrowing policies are essential for maintaining macroeconomic stability and fiscal health.
2. Over-borrowing Adjustment: It contended that Kerala had over-borrowed in prior years, warranting adjustments under Finance Commission norms.
3. Comprehensive Borrowing Definition: The Union argued that borrowings by State-Owned Enterprises and liabilities from Public Accounts must be included to prevent circumvention of borrowing limits.
4. No Irreparable Loss: The Union dismissed Kerala’s financial hardship claims, arguing that monetary losses are reversible and manageable.

H) JUDGEMENT

a. Ratio Decidendi

1. Judicial Review on Borrowing Powers: The Court emphasized that the scope of judicial review under Article 293 involves interpreting the balance between national fiscal stability and State autonomy.
2. Triple-Test Application: The denial of interim relief hinged on Kerala’s failure to satisfy the triple-test—prima facie case, balance of convenience, and irreparable injury.

b. Obiter Dicta

• The Court underscored the need for an authoritative interpretation of Article 293, particularly concerning its applicability to off-budget liabilities and State-Owned Enterprise borrowings.

c. Guidelines

• Interim injunctions involving fiscal matters must consider broader economic impacts, including market stability and national creditworthiness.
• Mandatory injunctions require a higher standard of proof due to their retrospective nature.

I) CONCLUSION & COMMENTS

While the judgment provides interim clarity, the broader constitutional issues remain unresolved, awaiting determination by a larger Bench. The decision reflects a cautious judicial approach in balancing fiscal decentralization with economic stability, highlighting the complexities of cooperative federalism in India.

J) REFERENCES

a. Important Cases Referred

1. State of Haryana v. State of Punjab, (2004) 12 SCC 673.
2. Dorab Cawasji Warden v. Coomi Sorab Warden, (1990) 2 SCC 117.
3. Shepherd Homes Ltd. v. Sandham, [1970] 3 WLR 348.

b. Important Statutes Referred

1. Constitution of India – Articles 131 and 293.
2. Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
3. Kerala Fiscal Responsibility Act, 2003.