Why did the Supreme Court deny interim relief to Kerala in borrowing limits case?

Why did SC not grant relief to Kerala

On April 1, the Supreme Court junked Kerala's plea for interim relief against the Union government seeking an increase of its borrowing limit to bail it out of immediate financial trouble.

“If 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,” the apex court order noted.

The court has however referred the larger issue of whether fiscal policy can be litigated upon to a larger five-judge bench. The case is to be placed before Chief Justice of India (CJI) DY Chandrachud-led bench.

The case pertained to Kerala’s suit against the Centre alleging that the latter was arbitrarily imposing a net borrowing ceiling, limiting the amount it could raise, 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.

In the two months the case was heard by a two-judge bench, it nudged both the Centre and Kerala to hold a dialogue on the issue of borrowing limits and avoid litigating in the court. The court was of the opinion that the officials handling finance at the state and the Centre were the best experts to deliberate on this issue.

The Union government offered to extend Kerala’s borrowing limit to a maximum of Rs 13,608 crore as on March 8. However, Kerala wanted the entire Rs 26,000 crore and hence the case decided to litigate, leading to an intense two-day hearing in the top court on this issue. However, Kerala was not able to convince the court to grant it any order.

Moneycontrol explains the key factors that went into SC’s order against Kerala.

Adverse impact on borrowing in the market:

The apex court accepted the Union government’s contention that granting interim relief to Kerala may have an adverse impact on the market. It contended that additional borrowing by the state would have spillover effects and may raise the prices of borrowing in the market, possibly crowding out the private sector.

According to the Centre, “This may then have an adverse impact on the production of goods and services in the market, possibly affecting the economic well-being of every citizen.” The court noted that while it can compensate Kerala retrospectively if it succeeds in the case, it cannot undo this adverse impact.

The court said, “It seems to us that the mischief that is likely to ensue in the event of granting the interim relief will be far greater than rejecting the same.”

Financial hardship not irreparable loss:

Kerala had sought for an urgent interim order contending that if it is not granted an immediate relief in the case, it would suffer irreparable damage. But the courtrejected this contention, noting, “‘Monetary damage’ is not an irreparable loss, as the Court can always balance the equities in its final outcome by ensuring that pending claims are adjusted along with resultant additional liability on the opposite side.”

Kerala brought the crisis on itself:

The court took note of Centre’s contention that Kerala is a highly debt-stressed state that has mismanaged its finances. The order said, “According to the Union, Kerala has the highest ratio of Pension to Total Revenue Expenditure among all States and requires urgent measures to reduce its expenditure. Instead of doing so, Kerala is borrowing more funds to meet its day-to-day expenses such as salaries and pensions.”

The apex court thus opined that Kerala has brought this financial crisis on itself because of its own actions and it would thus not necessitate an interim order from the court.  The order said, “There is an arguable point that if we were to issue interim mandatory injunction in such like cases, it might set a bad precedent in law that would enable the States to flout fiscal policies and still successfully claim additional borrowings.”

Centre has already made an offer:

Noting that the central government has already made a one-time offer to extend the borrowing limit by Rs 13, 608 crore, the SC observed that Kerala has secured substantial relief during the pendency of this interim application.

It said, “Even if we assume that the financial hardship of the Plaintiff (Kerala) is partly a result of the Defendant’s (Union) Regulations, during the course of hearing this interim application, the concern has been assuaged by Union of India to some extent so as to bail out Kerala from the current crisis.”