A lawsuit concerning borrowing limits set by the state of Kerala and the Centre is presently being heard by the Supreme Court. In a memorandum to the court, Attorney General R Venkataramani, speaking on behalf of the Centre, emphasized that state financial management is an issue of national importance. The statement also mentioned Kerala's financial difficulties brought on by poor management and mentioned Kerala's designation by the Reserve Bank of India as one of the five severely stressed states in need of immediate remedial action.
Kerala, West Bengal, and Punjab are said to have the worst budgetary administration in all of India. Kerala's government spent 78% of its earnings in the 2018–19 fiscal year, a notable increase in government spending. Additionally, the fiscal deficit increased, rising from 2.4% in 2017–18 to 3.1% in 2021–2022.
The AG has resisted Kerala's request for more funding from the Centre, claiming that the state is utilizing borrowed money to pay for ongoing costs like salaries and pensions rather than making profitable investments.
Kerala has been charged by the Centre of harming India's credit rating because of its state debt. The government issued a warning, stating that any state's failure to pay its debts on time could damage its reputation and have a cascading effect that would jeopardize India's financial stability.
The Center also made the argument that careless borrowing by a state for wasteful spending or poorly targeted subsidies could drive private borrowing out of the market. The production and supply of products and services would be adversely affected, and private industry borrowing costs would rise as a result.
According to the note provided by the Centre, an increase in a state's debt payment obligations as a result of increased borrowing may mean fewer funding for development, which could result in poverty and a loss of state and federal revenue.
All states provide that borrowing from any source requires permission from the Centre. The macroeconomic stability of the nation is taken into consideration when granting this authorization, and under Article 293(4), a borrowing cap is placed on the state requesting permission. The Finance Commission's proposals serve as the basis for this.
The Kerala government had filed an application for temporary relief, to which the Attorney General had responded. The Kerala government claims that it is unable to meet its annual budget obligations as a result of the Center's meddling in state finances. The Centre has lowered its borrowing ceiling, according to a lawsuit filed by the Kerala government, which could lead to a serious financial crisis in the state. The Fiscal Responsibility and Budget Management Act modifications as well as two letters from the Ministry of Finance are being contested in the lawsuit. The state says it needs over Rs 26,000 crore immediately.
