The Kerala government has moved the Supreme Court against the Central government for imposing a ceiling on the state’s borrowing capacity, stating that it violates the principles of fiscal federalism, reported Live Law on Wednesday.

In its petition, the state government has said that lowering the borrowing limit can potentially lead to a “grave financial crisis” in Kerala.

The Central government has fixed a borrowing limit of Rs 47,762.58 crore on Kerala for the current fiscal year, according to PTI. Of the total, Rs 29,136.71 crore is Open Market Borrowing while the rest is borrowing from other sources.

Under Open Market Borrowing, states can borrow from the market to meet their budgetary requirements.

Kerala has requested the Centre to allow an additional borrowing equivalent to 1% of the Gross State Domestic Product over and above the borrowing ceiling fixed for the fiscal year 2023-’24

However, on December 4, Union Finance Minister Nirmala Sitharaman said that there is no proposal to relax the existing terms for the borrowing capacity of state governments, including Kerala.

Against this backdrop, the Kerala government told the Supreme Court that it has the exclusive power to regulate its finances by preparing and managing its budget and borrowings.

It said that although the Constitution provides states fiscal autonomy to regulate their finances, the Centre is curtailing it.

“If the state is not able to borrow to the extent required based on the budget of the state, the state would not be able to complete its state plans for the particular financial year,” the petition states. “Therefore, it is essential for the progress, prosperity and development of the state and the people of the state that the state is able to exercise its constitutional rights and its borrowings are not impeded in any manner.”

It also said that Kerala requires nearly Rs 26,000 crore to avert an impending financial crisis.

The Pinarayi Vijayan-led government has said that it is unable to fulfil the commitments it made in the annual budget due to financial constraints. It also told the court that there are huge arrears in the welfare schemes in Kerala due to the restraints imposed by the Centre.

Sitharaman had told the Lok Sabha during the ongoing Winter Session that the Centre has been providing 50-year interest-free loans to state governments since 2020-’21 under the Scheme for Special Assistance to States for Capital Expenditure/Investment to help states enhance their capital expenditure and manage liquidity stress.