The Kerala government on Thursday told the Supreme Court that the Centre was attempting to control its financial affairs and acting like an “executive”, Live Law reported.

The Centre, in response, alleged that the state government had misrepresented financial figures and consistently overborrowed in recent years.

A bench of Justices Surya Kant and KV Viswanathan was hearing a petition filed in December by the Kerala government that challenged the Centre’s decision to limit the additional money the state can borrow, saying that it violated the principles of fiscal federalism.

The Communist Party of India (Marxist)-led state government had said in its plea that lowering the borrowing limit can potentially lead to a “grave financial crisis”.

On Thursday, senior advocate Kapil Sibal, representing the Kerala government, said that the state’s borrowings from the Centre had reduced from 98% to 2.9% post liberalisation. He said the state government had adhered to fiscal norms, adding that the Centre was acting as an “executive” and attempting to manage its financial affairs.

Citing constitutional provisions, Sibal said: “Each state is entitled to devise for itself what its programme should be, what its Budget should be, how much should it spend, and how much should it borrow.”

The advocate said that Kerala’s borrowing was within fiscal deficit limits. He added that the restrictions imposed by the Centre were “constitutionally impermissible”.

“You think the experts in our state and the decision-making authorities are not cognisant that they have to pay back the liability when it arises?” Live Law quoted Sibal as saying.

He added that the state had never defaulted since 1960.

“The market will not allow me to sell my bonds if they are deemed to be unsustainable...” Sibal said. “But the Union cannot, through an executive order, stop us from approaching the market.”

However, Additional Solicitor-General N Venkataraman, representing the Centre, alleged that Kerala’s revenue deficit showed an unsustainable financial situation. He added that the state government had consistently borrowed beyond their prescribed amounts in the recent past.

Venkataraman also said that the Comptroller and Auditor General of India had reported that the state government had not met the targets set in its medium-term fiscal policy.

He added that the Centre had declined similar requests made by other states.

“These requests have been made by the chief ministers,” he added. “We have declined. They want overborrowing over and above the guidelines.”

The court reserved its order on the Kerala government plea’s on Friday, ANI reported.

The case

The Centre has fixed a borrowing limit of Rs 47,762.58 crore for Kerala for the current financial year. Of this, while Rs 29,136.71 crore is open market borrowing, the remainder are borrowings from other sources. Under open market borrowing, states can borrow from the market to meet their budgetary requirements.

Kerala had 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 financial year 2023-’24. The state had said that it urgently requires around Rs 26,000 crore to meet its financial obligations.

Earlier this month, the Centre had refused the state government’s request to borrow Rs 19,351 crore, Live Law reported. It had cited Kerala’s Budget deficit.

In response, the Supreme Court told the Centre to consider a certain amount of flexibility in the borrowing limits keeping in mind the state government’s urgent financial needs.

Last week, the state government rejected the Centre’s proposal allowing it to borrow an additional Rs 5,000 crore, Live Law reported.

The Centre’s proposal had come after the Supreme Court suggested allowing a one-time concession that would alleviate Kerala’s financial crisis before the end of the current financial year on March 31.

However, Sibal had said that the amount would not suffice.

Sibal also told the court that the Centre’s concession had stringent conditions based on the presumption that the state government was not entitled to the additional borrowing. He said that Kerala had a strong case for it to be granted interim relief.

Also read: Centre will allow additional borrowing if we withdraw our lawsuit: Kerala tells Supreme Court