The Supreme Court while hearing Kerala's Suit alleging Centre's interference in exercise of its exclusive, autonomous and plenary powers to regulate its own finances by putting a ceiling on net borrowing, has suggested the Centre and the State to have a dialogue and sort out issues amicably.

The Centre and the State have unanimously agreed to the said suggestion and are likely to engage in a dialogue tomorrow.

A bench of Justice Surya Kant and Justice K.V. Vishwanathan will hear the matter next on February 19, 2024.

Today, when the matter was called again post lunch, Attorney General R Venkatramani appearing for the Union of India said, "The government is open to a meeting and I thought let it be kept without putting that I hope there could be an open dialogue and whatever emerges out of it will pave a way onwards...".

To which even the bench agreed and Senior Advocate Kapil Sibal appearing for the State also nodded in affirmation.

"Whether it is the State or the Centre, they are seasoned administrators. They have seen public life, official life in different capacities, they have seen the world. So we are very confident that they will be able to...", said Justice Surya Kant.

"Milords what we will do is that we will fly our delegation from Kerala by tomorrow morning. We can have a meeting tomorrow itself. Milords, unfortunately, the budget is being presented by the Finance Minister, that is going on today, tomorrow and day after, so the others will come and the dialogue can start tomorrow itself", responded Sibal.

Subsequent to which, Justice Surya Kant said, "We need you to work out the modalities".

"We will work it out", said the AG.

Sibal then said, citing the urgency in the matter, "...I am not on merits, the urgency is... what happens is we borrow through ways and advance...".

However, Justice Surya Kant intervened to say, "See Mr Sibal, instead of telling us you need to tell the other quarter..".

Then Sibal, turning towards the AG said that they will fix it themselves.

Today, in the morning, while the bench heard the matter, it was of the opinion that the Union without affecting the fiscal policy can still think of maintaining cordiality among the States keeping State of Kerala in purview. It was further of the opinion that the issues in the matter can be sorted out through negotiation and it said that in any event, the court will come to the rescue as the last arbiter.

Sibal then as a proposal submitted that he can ask the the State Finance Minister to come to Delhi today evening itself. Sibal said that even if the money is allotted now, the State would still be in a deficit. To which, ASG N Venkatraman responded by saying that it was the CAG and the finance commission which had taken a call and not the Finance Ministry.

Pertinently, amidst the ongoing Centre-State tussle between Kerala and the Centre, a detailed note was earlier 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.

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.

Cause Title: State of Kerala v Union of India