Financial Mismanagement of State, Doesn't Justify Interim Relief Against Union: Supreme Court

Supreme Court rejects Kerala's plea for extra borrowing due to financial mismanagement. It warns against setting a precedent for flouting fiscal policies.

The Supreme Court turned down Kerala's plea to borrow an extra Rs 10,722 crores for the 2023-24 financial year, stating that financial difficulties caused by a state's poor financial management can't be a basis for seeking immediate help.

"If a state has financial problems because of its own actions, it can't ask for urgent help from the Union," said the Bench comprising Justices Surya Kant and KV Viswanathan.

The Court expressed concerns that allowing such requests might encourage states to borrow more than allowed, setting a harmful precedent. "If we grant immediate help in such cases, it could lead to states ignoring financial rules and still getting extra money," the court added.

The Court found that the Union's arguments were more convincing based on three criteria: having a strong initial case, considering what's most convenient, and preventing irreparable harm.

"We're leaning towards agreeing with the Union that if a state has borrowed too much in the past, it can borrow less in the future, even after the 14th Finance Commission's period. But this needs to be decided conclusively," the court noted.

The Court also recalled past discussions where it disagreed with the Union's condition that Kerala should drop its lawsuit to borrow an extra Rs 13,608 crores. The Union had previously agreed to allow borrowing of Rs 5,000 crores, and later consented to Rs. 8,742 crores and Rs. 4,866 crores, totaling Rs. 13,608 crores.

"We can't accept Kerala's claim that there's space to borrow Rs 10,722 crores, as requested during the hearing, or Rs 24,434 crores, as discussed with the Union," the Court stated.

The Union argued against Kerala's extra borrowing, fearing it might raise borrowing costs for everyone, including private investors, and hurt the economy. It emphasized the importance of regulating state borrowing to maintain macroeconomic stability and the country's creditworthiness internationally.

Kerala argued that the Union couldn't control state borrowing under Article 293, as conditions could only be imposed on loans from the Central Government.

But the Union countered that this interpretation would make Article 293 useless since the Central Government can impose conditions on loans even without specific constitutional provisions.

The Court acknowledged the lack of a clear interpretation of Article 293 and decided to refer the matter to a larger bench for a definitive decision. Consequently, it denied Kerala's request for extra borrowing to address its fiscal needs.