Kerala represents the cause of all the States, States' right to borrow referred to Constitution Bench

On April 1, 2024, in State of Kerala v. Union of India, Justices Surya Kant & K.V. Viswanathan bench of Supreme Court observed that "The main case be placed before Hon’ble the Chief Justice of India for constitution of an appropriate Bench." The original suit was filed on December 8, 2023. It was registered on January 6. 2024. The arguments were heard and the order was reserved on March 22, 2024. 

The State of Kerala had instituted the original suit under Article 131 of the Constitution of India against the Union of India. It has challenged amended Section 4 of the Fiscal Responsibility and Budget Management Act, 2003, whereby the Central Government is obligated to ensure that the aggregate debt of the Central Government and the State Governments does not exceed sixty percent of the gross domestic product by the end of Financial Year 2024-25. It challenged Union government's letter dated March 27, 2023 imposing a ‘Net Borrowing Ceiling’ on the State of Kerala, to restrict the maximum possible borrowing the State could make under law. It also challenged Union government's letter dated August 11, 2023 providing its consent to the State of Kerala to raise open market borrowing of Rs 1,330 crores underlining that the total open market borrowing allowed to the Plaintiff for the Financial Year 2023-24 was Rs 21,852 crores.

Under Chapter II, Part XII, Article 293 (1) of the Constitution which deals with "Borrowing by States", the Union of India does not have the power to regulate all the borrowings of a State and conditions can be imposed only on the loans sought from the Union Government. It reads: "293. Borrowing by States- 1) Subject to the provisions of this article, the executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits, if any, as may from time to time be fixed by the Legislature of such State by law and to the giving of guarantees within such limits, if any, as may be so fixed." It is apparent that Union government has violated this provision of the Constitution by preventing Kerala to pursue its governmental duty under the four corners of Article 293 (1) of the Constitution of India. 

Kerala's cause is the cause of all the States. Meanwhile, Union had agreed to allow borrowing of Rs 13,608 crores if State withdrew its suit. This kind of approach amounts to blackmailing of States by the Union government. Why did Union of India, the defendant put a condition for withdrawal of the suit? Supreme Court rightly disapproved of the condition. There was a logical compulsion for Justices Surya Kant and K.V. Viswanathan to grant interim relief to Kerala against Union of India challenging limits imposed on State's borrowing capacities. In its 24 page long judgement, the Court records:"The Defendant has already made an offer to allow additional borrowing. In a meeting dated 15.02.2024, the Defendant first offered consent for INR 13,608 crores, out of which INR 11,731 crore was subject to the pre-requisite of withdrawal of the suit, a condition that we disapproved of. Subsequently, in a meeting dated 08.03.2024, the Union offered a consent for INR 5,000 crores. Further, vide circulars dated 08.03.2024 and 19.03.2024, the Union has accorded consent for INR 8,742 crores and INR 4,866 crores respectively, which comes to a sum total of INR 13,608 crores. Even if we assume that the financial hardship of the Plaintiff is partly a result of the Defendant’s Regulations, during the course of hearing this interim application, the concern has been assuaged by the Defendant – Union of India to some extent so as to bail out the Plaintiff – State from the current crisis. The Plaintiff thus has secured substantial relief during the pendency of this interim application." The State could secure "substantial relief" because Kerala, the plaintiff is on strong grounds.

Chief Justice Dr. D.Y. Chandrachud is likely to constitute a Constitution Bench of appropriate strength before July to affirm the recognized rights of the States. The rights of Union of India and States of India are limited by Constitution of India and the principles of constitutionalism.