Battle over state finances heats up as Kerala rejects another offer from Centre

The Supreme Court will next hear Kerala’s plea against the central government on March 21.

Kerala has rejected yet another offer by the Centre,  allowing it an advanced and additional borrowing space of Rs 5,000 crore in the current fiscal, on the grounds that it is insufficient. The first offer was made in February 2024. Kerala seeks advance borrowing of Rs 15,000 crore.

The dispute between the two sides reached the doors of the top court of the country in December after bilateral talks didn't yield results. The Supreme Court will next hear Kerala’s plea against the central government over the states’ borrowing limit on March 21.

Moneycontrol explains what round two of the tussle between the two sides entailed.

Documents sourced by Moneycontrol showed that the government of India modified its offer to Kerala, ready to give its consent for the state to borrow Rs 5,000 crore now instead of on April 1, 2024, subject to certain conditions.

However, the Pinarayi Vijayan-led Kerala government told the Supreme Court that “Rs 5,000 crore would not take it anywhere.”

And, just like that, the second round of talks between the two sides failed, following an intense showdown between senior counsel Kapil Sibal who appeared for Kerala and Additional Solicitor General Venkatraman who appeared for the central government.

Centre’s Modified offer

Though the Centre blamed the state alone for its fiscal crisis, on February 19, the former told the apex court that it had offered a borrowing space of Rs 13,608.57 crore, if Kerala withdrew the plea.

Though Kerala decided not to take this offer and argued the case out in the SC, the court encouraged Kerala and Centre to hold another round of talks. However the second round of talks failed as well.

The SC again urged the Centre to consider giving Kerala a ‘one time package’  by the end of FY 24 to ensure that the State is out of financial strain.

Following this, the Union decided to provide the additional borrowing space of Rs 5,000 crore. But, as cited above, this offer came with four conditions.

a) This amount of Rs 5,000 crore will be deducted from the Net Borrowing Ceiling (NBC) of Kerala for the first nine months of FY 2024-25.

b) No ad-hoc borrowing will be granted to the state in the next fiscal and consent for borrowing in 2024-25 will only be issued on receipt of the prescribed information and documents from the Kerala government.

c) Consent to Kerala for borrowing  in the first nine months of 2024-25 will be issued on a quarterly basis for up to 25 percent of the eligibility arrived at after deducting the Rs 5,000 crore.

d) The government of Kerala will submit a Plan-B, announced in its FY25 Budget, for raising resources and improving the financial position of the state and will put that plan into action before getting the consent to borrow during the last quarter of 2024-25.

But Kerala refused to take the offer and decided to continue with the litigation.

What was centre’s rationale in rejecting Kerala’s demand?

The ASG pointed out that if the consent to borrow Rs 15,000 crore, as demanded by Kerala is given in the current fiscal, the state will be left with the borrowing space of only Rs 6,664 crore to meet its requirements for the first nine months of 2024-25. “This will in all probability trigger serious hardships for Kerala,” he said.

Looking at the expenditure trend of Kerala in 2023-24, the state was given total borrowing approval of Rs 21,852 crore for the first nine months, which was exhausted within the first six months at an average of Rs 3,642 crore per month.

Moreover, if Kerala's request for Rs 15,000 crore advance borrowing is agreed to, other states may cite it as a precedent and demand relaxation of guidelines, approaching the Court on grounds of discrimination, Venkatraman said.

How do NBC’s work?

The net borrowing ceiling (NBC) of the state governments is typically communicated by the Government of India to the state governments at the start of each fiscal year.

The upper limit of states’ borrowings has been set at 3.5 percent of their GSDP for FY24 and FY25. For the current fiscal year, 0.5 percent of the ceiling was linked to power sector reforms.

The Centre gives consent for 75 percent of the total borrowing ceiling of the states in the first nine months of the financial year. For Kerala, for FY25 this amount comes to Rs 21,664 crore on the projected GSDP of Rs 11.20 lakh crore, after making deductions for earlier off-budget borrowing.

Timeline of the case 

In its plea, Kerala alleged that the Centre was arbitrarily imposing a net borrowing ceiling, thereby limiting the amount the former could raise through all sources, leading to an urgent requirement of around Rs 26,000 crore to meet its financial obligations.

The Left Democratic Front (LDF) government has accused the Union Finance Ministry of imposing a Net Borrowing Ceiling in a manner that limits it from raising funds from all sources, including open market borrowings.

Further, the Centre has reduced the Net Borrowing Ceiling of the state by introducing aspects into the “borrowing”, which otherwise are not considered “borrowings".

The Centre, in its plea, stated that the Union has long relied on Article 293 (3) and 294 (4) of the Constitution to control spending and borrowing by states. The limit is recommended by the Finance Commission based on a pre-approved formula.

According to the 15th Finance Commission’s recommendations, the upper limit of states’ borrowings can be set at 3.5 percent of their GSDP for FY24 and FY25. For the current fiscal year, 0.5 percent of the ceiling was linked to power sector reforms.