Supreme Court: In a suit filed by Kerala Government under Article 131 of the Constitution of India alleging Union Government’s interference in State’s power to borrow and regulate its finances, and seeking interim relief of additional borrowing powers, the division bench of Surya Kant* and KV Viswanathan, JJ. has refused to grant interim relief to the State, as the State has failed to establish the three prongs of proving prima facie case, balance of convenience and irreparable injury. Further, the Court said that the present suit raises issues relating to the interpretation of the Constitution and referred the matter to a Constitution Bench comprising 5-judges in terms of Article 145(3) of the Constitution.
Background:
In December 2023, the State of Kerala approached the Supreme Court, alleging encroachment by the Central Government over its fiscal affairs. The State asserted that certain directives and amendments issued by the Ministry of Finance were impeding its ability to fulfil budgetary commitments, thereby jeopardizing important welfare schemes and developmental initiatives planned in its annual budget.
The State Government was concerned about the lowered borrowing limit imposed by the Union Government, potentially giving rise to a severe financial crisis with the State urgently requiring around Rs 26,000 crore to meet its financial obligations.
The State challenged the following impugned actions of the Union:
- Amendment of 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 (F.Y.) 2024-25
- Letter dated 27-03-2023: Through this letter, the Union has imposed a ‘Net Borrowing Ceiling’ on the State, to restrict the maximum possible borrowing that the State could make under law. This ceiling was quantified as three percent of the projected Gross State Domestic Product (GSDP) for the F.Y. 2023-24, which came to INR 32,442 crores.
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Letter dated 11-08-2023- In this letter, the Union has accorded its consent to the State to raise open market borrowing of INR 1,330 crores. It has also noted that the total open market borrowing allowed to the State for the F.Y. 2023-24 was INR 21,852 crores
Besides the final relief in the suit, the State also seeks interim injunction, inter alia, to mandate Union of India: (a) to restore the position that existed before the Union imposed ceiling on all the borrowings of the State; and (b) to enable the State to borrow INR 26,226 crores on an immediate basis
Analysis:
The Court noted that the instant suit has been filed on the premise that by undertaking the Impugned Actions, the Union has exceeded its power under Article 293 of the Constitution.
After critical analysis of the contentions of both the sides, the Court noted that the instant suit raises more than one substantial questions regarding interpretation of the Constitution, including:
- Interpretation of Articles 131 and 293 of the Constitution.
- Whether Article 293 vests an enforceable right on the States to borrow from Government and other sources and if yes, to what extent it can be regulated by the Union.
- Whether the borrowing by state-owned enterprises and liabilities arising from public accounts be included under the purview of Article 293(3) of the Constitution.
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Scope of judicial review regarding fiscal policy.
While noting that Article 293 of the Constitution has not been subjected to any authoritative interpretation until now, the Bench thought it fit to refer the matter to a 5-judge Constitution bench.
Moreover, the Court opined that various questions of significant importance impacting the Federal Structure of Governance as embedded in our Constitution, arise for consideration.
Concerning the interim relief, the Court referred to the Triple-Test followed by the Courts as the pre-requisites before a party can be mandatorily injuncted to do or to refrain from doing a particular thing, namely, Prima facie case, Balance of convenience, and Irreparable injury. It also distinguished the standard of scrutiny in applying these parameters for ‘prohibitory’ and ‘mandatory’ injunctions.
The Court remarked that mandatory injunctions require the defendant to take a positive action instead of merely being restrained from performing an act, they carry a graver risk of prejudice for the defendant if the outcome subsequently turns out to be in its favour.
The Court noted that the State has sought mandatory injunction and not a prohibitory one. Further, it said that State is required to meet a higher standard for the triple-test of interim relief , as instead of arguing that the Union should refrain from imposing a Net Borrowing Ceiling during the next F.Y., the State has applied for a backward-looking injunction, i.e., for an injunction to undo the imposition of the Net Borrowing Ceiling that covered various liabilities and to restore the position that existed before such ceiling.
The Court accepted the argument of the Union that if there is any over-utilization of the borrowing limits by a State in the previous year, to the extent of over-borrowing, deductions are permissible in the succeeding year, even beyond the award period of the 14th Finance Commission.
The Bench further said that prima facie, there is a difference in the mechanism which operates when there is under-utilization of borrowing and when there is over-utilization of borrowing. The State has not been able to demonstrate at this stage that even after adjusting the over-borrowings of the previous year, there is fiscal space to borrow.
The Court also took note of the Kerala Fiscal Responsibility Act, 2003, and accepted the submission of the Union that after inclusion of off budget borrowing for F.Y. 2022-23 and adjustments for over-borrowing of past years, the State has no unutilized fiscal space and that the State has over-utilized its fiscal space. Hence, the Court noted that at the interim stage there is no fiscal space of unutilized borrowing.
Therefore, the Court held that the State has failed to establish a prima facie case regarding its contention on under-utilization of borrowing.
Further, the Bench said that as the State has essentially created financial hardship because of its own financial mismanagement, such hardship cannot be held to be an irreparable injury that would necessitate an interim relief against Union.
Concerning the balance of convenience, the Court said that the mischief that is likely to ensue in the event of granting the interim relief, will be far greater than rejecting the same, as if the interim injunction is granted and the suit is eventually dismissed, turning back the adverse effects on the entire nation at such a large scale would be nearly impossible. However, if the interim relief is declined at this stage and the State succeeds subsequently in the final outcome of the suit, it can still pay the pending dues, maybe with some added burden, which can be suitably passed on the judgment – debtor. Thus, the Court held that the balance of convenience lies in favour of Union of India.
The Court viewed that State has failed to establish the three prongs of proving prima facie case, balance of convenience and irreparable injury, therefore it is not entitled to the interim injunction.
[State of Kerala v. Union of India, 2024 SCC OnLine SC 476, Order dated 01-04-2024]
*Order by: Justice Surya Kant
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