The Supreme Court is currently hearing a case between the Centre and the state of Kerala over imposed borrowing limits. Attorney General R Venkataramani, representing the Centre, submitted a note to the court emphasising that the management of public finances by states is a matter of national concern. The note further highlighted Kerala’s financial distress due to mismanagement and stated that the Reserve Bank of India has categorised Kerala as one of the five highly stressed states requiring urgent corrective measures.
Punjab, West Bengal, and Kerala are reported to have the poorest fiscal management in India. Kerala’s government expenditure has seen a significant rise, with 78 per cent of its revenue income being spent in the fiscal year 2018-19. The fiscal deficit has also escalated from 2.4 per cent in 2017-18 to 3.1 per cent in 2021-2022.
Kerala’s demand for additional funds from the Centre has been opposed by the AG, stating that the state is using borrowed funds to cover recurrent expenses such as salaries and pensions, instead of investing in profitable ventures.
The Centre has accused Kerala of negatively impacting India’s credit rating due to its state debt. The government warned that any state defaulting on debt servicing could create reputation issues and a domino effect, threatening India’s financial stability.
The Centre also pointed out that reckless borrowing for unproductive expenses or poorly targeted subsidies by a state could oust private borrowing from the market. This would then escalate the borrowing costs for private industries, negatively affecting the production and supply of goods and services.
The increase in a state’s debt servicing liabilities due to higher borrowing could result in reduced funds for development, leading to impoverishment and loss of state and national income, the note submitted by the Centre explains.
The Centre’s permission is required by all states to borrow from any source. This permission is granted keeping in mind the country’s macroeconomic stability and a borrowing limit is set for the state seeking permission under Article 293(4). This is done based on the Finance Commission’s recommendations.
The Attorney General’s response was in response to an application for interim relief filed by the Kerala government. The Kerala Government alleges that the Centre’s interference in state finances has hindered its ability to fulfil its annual budget commitments. The Kerala Government has filed a suit claiming that the Centre has reduced its borrowing limit, potentially causing a severe financial crisis in the state. The suit challenges two letters from the Ministry of Finance and amendments to the Fiscal Responsibility and Budget Management Act. The state claims it urgently requires approximately Rs 26,000 crore.
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