In the recent judicial deliberations in New Delhi, the Supreme Court underscored Kerala’s failure to substantiate the trifecta of establishing a prima facie case, striking a balance of convenience, and demonstrating irreparable injury. Consequently, the interim injunction sought by Kerala was denied, echoing the Center’s argument that excessive utilization of borrowing limits by the state could lead to substantial reductions in subsequent years.

Representing the Center, Additional Solicitor General N. Venkataraman emphasized the dire consequences on the nation’s fiscal health should Kerala be granted interim relief. He cautioned that additional borrowing by the state could ripple through the market, potentially inflating borrowing costs and squeezing out private investors, thereby adversely impacting the market’s production of goods and services and subsequently affecting the economic well-being of citizens.

The bench, comprising Justices Surya Kant and K V Vishwanathan, opined that the balance of convenience decisively favors the Union of India, declining Kerala’s plea for ad interim relief in an original suit under Article 131 of the Constitution. Notably, the Center had allocated additional provisions amounting to Rs 13,608 crore for the state government.

Highlighting Kerala’s attempt to equate ‘financial hardship’ with ‘irreparable injury,’ the bench remarked that monetary damages do not necessarily constitute irreparable loss. It suggested that the court could address pending claims and resulting liabilities in its final verdict.

The Center contended that Kerala, allegedly one of the most financially strained states, had mismanaged its finances, a claim vehemently denied by the state. According to the Union, Kerala has the highest ratio of Pension to Total Revenue Expenditure among all states and urgently needs to curtail its expenditure. Instead, Kerala continues to borrow funds to sustain its daily operations, such as salaries and pensions, argued the Center.

The bench reiterated that Kerala’s failure to establish a prima facie case, balance of convenience, and irreparable injury precludes it from obtaining interim relief. It cautioned against the potential widespread repercussions of granting such relief, emphasizing the challenges of rectifying adverse effects on a national scale if the suit were eventually dismissed.

Referring the suit to the Chief Justice of India for consideration by an appropriate constitution bench of five judges, the apex court framed key issues for determination, including the constitutional provisions governing a state’s borrowing rights and the extent of judicial review concerning fiscal policy.

The apex court’s judgment stemmed from an original suit filed by the Kerala government, alleging undue interference by the Center in its budgeting process through executive actions. Kerala asserted that the Union’s actions impeded its ability to borrow and regulate its finances, exacerbating its inability to settle outstanding arrears.

The Union of India argued that unregulated state borrowings could jeopardize macroeconomic growth and stability, prompting the need for regulatory measures.

In its assessment, the bench found merit in the Union’s submission that Kerala had exhausted its fiscal space through over-borrowing, leaving no room for further borrowing. It underscored the distinction between under-utilization and over-utilization of borrowing limits, suggesting that deductions are permissible in subsequent years following over-borrowing.

In conclusion, the bench expressed inclination towards the Union’s argument regarding deductions following over-utilization of borrowing limits, emphasizing that the final determination rests with the court.