The Supreme Court has asked the Centre to respond in two weeks to a suit by the Kerala government accusing it of interfering in exercise of its "exclusive, autonomous and plenary powers" to regulate the state's finances by imposing a ceiling on net borrowing.
A bench of justices Surya Kant and KV Viswanathan told Attorney General R Venkataramani, appearing for the Centre, to file its response to the suit as well as to an application moved by the state for urgent orders to avert the "impending financial crisis".
The Attorney General questioned the maintainability of the suit and said there is no urgency for the orders as claimed by the Centre.
"How can a suit be filed in this matter, when the question is about the economic policy of the state? There is failure on part of the state government, which is being masked by filing the suit," Venkataramani argued.
Senior advocate Kapil Sibal, appearing for the Kerala government, said the state is in urgent need of the money and the cap imposed on borrowing if affecting its financial discipline.
The bench after hearing both the counsel told the Attorney General that it will be better if the Centre files its response to the suit and posted the matter for further hearing on February 13.
"Even if we have to dismiss the application, the response of the Union of India will be necessary," the bench said in its hearing held on Thursday.
On January 12, the top court had sought the Centre's response on the suit filed by the Kerala government.
In an original suit filed under Article 131 of the Constitution, the Kerala government has said the Constitution bestows fiscal autonomy on states to regulate their finances under various articles, and borrowing limits or the extent of such borrowings are regulated by a state legislation.
Article 131 of the Constitution deals with original jurisdiction of the apex court in any dispute between the Centre and states.
The suit referred to the letters dated March 27, 2023 and August 11, 2023 issued by the Centre, through the Ministry of Finance (Public Finance-State Division), Department of Expenditure, and the amendments made to section 4 of the Fiscal Responsibility and Budget Management Act, 2003.
It alleged that the Centre "seeks to interfere with the finances of the state by (i) imposing a net borrowing ceiling on the plaintiff state in the manner deemed fit by the defendant Union, which limits borrowings from all sources including open market borrowings..."
It also gave the figure of dues as on October 31, 2023 which had accumulated over the years because of the financial constraints stemming from the ceiling imposed by the Centre on borrowing.
"The plaintiff state submits that the said amount of Rs 26,226 crores is imminently and urgently required in order for the plaintiff state to avert the impending grave financial crisis that has been caused by the impugned orders," the suit, filed through advocate C K Sasi, said.
It said the suit "squarely raises a dispute as to the right, power and authority of the defendant Union (of India) to interfere with the exclusive, autonomous and plenary powers of the plaintiff state to regulate its own finances under several provisions of the Constitution". The suit claimed the Centre's actions "fall foul of, and violate the federal structure of the Constitution".
It said the borrowing limits or the extent of such borrowings are regulated by the Kerala Fiscal Responsibility Act, 2003 as amended from time to time.
The suit said the ability to determine the borrowing of the state in order to balance the budget and make up for the fiscal deficit is exclusively within the domain of the states.