Centre must be concerned with fiscal mismanagement of states as it impacts nation's economy: SC

New Delhi: Fiscal mismanagement by states is an issue the union government has to be concerned about as it impacts the nation's economy, the Supreme Court observed on Wednesday and advised the Centre and the Kerala government to iron out their differences in a cap on net borrowing by the southern state. The apex court made the observation while it was hearing a suit filed by the Kerala government accusing the Union of India of interfering in the exercise of its "exclusive, autonomous and plenary powers" to regulate the state's finances by imposing a ceiling on borrowing. The dialogue between the Centre and the state must not stop merely because of the pending suit, the court said while stressing the need to resolve the issue.

"Let all the senior officials who are capable of taking decisions and who are already involved in decision-making sit together and resolve this," a bench of Justices Surya Kant and K V Viswanathan said.

The Kerala government had told the top court on February 19 that a meeting held on February 15 failed to make much headway in resolving the contentious issue.

Appearing for the Kerala government on Wednesday, senior advocate Kapil Sibal said the state was left with no choice but to agitate the issue. Sibal said he wanted to inform the court with a "heavy heart" that though the issue needed to be resolved in the spirit of cooperative federalism, it has not.

At the moment, Sibal said, the state needed a breather.

The bench said Sibal had submitted a note at the last hearing where he gave a brief description of an agreement that was probably reached at the February 15 meeting. Additional Solicitor General (ASG) N Venkataraman, appearing for the Centre, had also given a note, the court recalled.

The notes, the bench recalled, said since Kerala has challenged the Centre's power to impose conditions on borrowing, the state's request for additional borrowing can only be considered after it has withdrawn the suit.

"What we only want to suggest to you right now is that you don't insist on the condition of withdrawal of the suit," the bench told the Centre, adding the Government of India can impose other conditions for improved fiscal management.

With Attorney General R Venkataramani and ASG Venkataraman representing the Centre, the bench said, "You cannot say withdraw the suit. That is a constitutional right under Article 131 (of the Constitution)." Article 131 empowers the apex court to deal with disputes between the Centre and a state or between states.

Sibal said there was a need to tackle the issue today as the state needs to borrow a certain amount. "It is not that the Union has picked out something which is only adverse to a particular state," the attorney general said.

The bench, while taking note of their arguments, said the matter requires "very serious consideration because fiscal mismanagement of the states is an issue with which the Union must be concerned because ultimately it has its own impact on the nation's economy".

At the previous hearing, the apex court was told that in the February 15 meeting, the Union of India had said it was going to release over Rs 13,000 crore to the state straightaway. The bench observed the Centre has said it will approve the release of Rs 13,608 crore to the state.

"As regards their (Kerala) additional demand, let a meeting be held today itself in the afternoon or maybe tomorrow," the court said.

The ASG, while advancing his arguments, said the fiscal deficit is on "deep decline" and that India is better placed than G-7 nations in terms of economic stability.

The bench concurred with him and observed that the world was recognising the robustness of India's economy.

"Even in judicial functions, when we go outside the country, there we get this kind of feel… It is not based on perception. It is based on correct facts and figures and the strong pillars on which the economy is surviving and thriving," the bench said.

The bench said the dialogue between the Centre and the Kerala government on the issue must not stop. "The dialogue must continue. That is the strength of the relationship between the Union and the state," it said.

The bench said it will not fix a next date for hearing the matter and the parties were at liberty to mention it whenever they want.

The Kerala government has approached the Supreme Court accusing the Centre of interfering in the exercise of its “exclusive, autonomous and plenary powers” to regulate the state’s finances by imposing a ceiling on net borrowing.

In an original suit filed under Article 131, the Kerala government said the Constitution bestows fiscal autonomy upon states to regulate their finances under various articles, and the borrowing limits are regulated by state legislation.

In a note submitted before the top court, the Centre had said uncontrolled borrowing by states would affect the credit rating of the whole country, and that the fiscal edifice of Kerala has been diagnosed with “several cracks”.