The Attorney General for India on Tuesday filed a written note in the suit filed by the State of Kerala against the Centre over the limits imposed on borrowing capacities.
The State mentioned that the Centre has imposed a Net Borrowing Ceiling (NBC) and has included borrowings made by the State Owned Enterprises to compute the NBC, which has limited the state’s borrowing powers. Furthermore, the state also took objections to the Centre’s taking into consideration the liabilities arising from the Public Account of the States to compute the NBC.
Responding to the suit, AG Venkataramani in his note stressed that public finance management is a national issue and debt of the States affects the credit rating of the country. He further underlined that default by any State in debt servicing would create reputational issues and will have a domino effect endangering the financial stability of the whole of India.
The note mentioned that if the State indulges in reckless borrowing to finance unproductive expenditure or poorly targeted subsidies, it will crowd out private borrowing from the market. This will lead to increase in the borrowing costs of private industries and adversely impact the production and supply of goods and services in the market, it continued.
AG Venkataramani further stated that all States require permission of the Centre to borrow from any source. The Centre, while granting the permission, keeps in mind the overall objectives of macroeconomic stability of the country as a whole and fixes a borrowing limit for the State seeking its permission, under Article 293(4).
It added that the borrowing limits of States are fixed in a non-discriminatory and transparent manner guided by the recommendations of the Finance Commission. The AG also critically commented on the tendency of States to resort to off-budget borrowing as it affects transparency and suppresses actual liabilities.
The note underscored that Kerala has resorted to off-budget borrowing of Rs 42,285 crore from 2016-17 to 2021-22 through two state-owned entities (KIIFB and KSSPL) to circumvent the borrowing limits. Furthermore, AG R Venkataramani mentioned the poor public financial management in Kerala and stated that any financial stress faced by the Government of Kerala is purely due to financial mismanagement.
In January, the Division Bench of Justices Surya Kant and KV Viswanathan issued notice to the Union. The suit was posted on February 13 to consider Kerala’s prayer for interim relief.