Amidst the ongoing Centre-State tussle between Kerala and the Centre, a detailed noted has been filed by Attorney General (AG) R. Venkatramini before the Supreme Court highlighting the poor public finance management by the State despite several financial grants by the Centre.

Several reports and studies were cited and referred to argue that the State government's demand for more funds from the Centre will not resolve its problem as Kerala is a "highly debt stressed" State.

The note was filed as a response to a Suit filed by the State last year, alleging that the Central government was interfering with its power to borrow and regulate its own finances. As per the State, the action to regulate its powers would lead to a grave financial crisis.

A bench of Justice Surya Kant and Justice K.V. Vishwanathan will hear the matter on February 13, 2024.

The centre while highlighting that the State is one of the most financially unhealthy States in the country, said, "Kerala has been one of the most financially unhealthy States and its fiscal edifice has been diagnosed with several cracks… Squeezed for funds for capital expenditure and to circumvent borrowing limits imposed by its own FRBM Act and similar limits precirbed by the Central Government, Kerala has resorted to substantial off-budget borrowing through the Kerala Infrastructure Investment Fund Board (KIIFB) ...”.

The 12th Finance Commission classified Kerala among the States with deteriorating debt situation reflected both in terms of the Debt-GSDP ration and the ration of interest payments to revenue receipts. As per the Commission, Kerala had one of the lowest percent of capital expenditure at 1.1.%. The 14th Commission had noted that there were only three States with revenue deficits in 2007-08 namely, Kerala, Punjab and West Bengal. The 15th Finance Commission designated Kerala to be a “highly debt stressed” State.

As per the note, a study published in the September 11, 2021 issue of the Economic and Political Weekly titled “Utilisation of Government Borrowings in major Indian States” has also noted that Kerala has shown poor and unproductive utilisation of its debt receipts.

On the Central grants allotted to the State, the note read, “Despite the devolution of substantial resources from Central taxes and duties, highest share of post devolution Revenue Deficit Grant, financial support extended by the Union Government over and above the recommendations of the Finance Commission and substantial transfer of resources to the State Government under the Centrally Sponsored Schemes, any financial stress that the Government of Kerala is facing is purely due to its own financial mismanagement”.

“Acute financial crisis faced by Kerala was also recognized in its own Government’s white paper published in June 2016. The paper had noted that the entire borrowing was just sufficient to meet the day to day expenditure, no funds were left for capital expenditure and schemes in the budget had no resources to finance them. A study on State Finances of Kerala conducted by the Indian Institute of Management, Kozhikode in 2017 also pointed towards poor public finance management in the State. Moreover, the Kerala Public Expenditure Review Committee constituted under its FRBM has in its report published on April 2019 pointed towards high committed liability and widening revenue deficit”, it further read.

Cause Title: State of Kerala v Union of India

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