Union has accorded consent for INR 13,608 crore: Apex Court rejects Kerala Govt’s plea seeking injunction to undo imposition of Net Borrowing Ceiling
Justices Surya Kant & K.V. Viswanathan [01-04-2024]

Read Order: State of Kerala v. Union of India [SC- Original Suit No. 1 of 2024]

Tulip Kanth

New Delhi, April 1, 2024: While rejecting the Kerala government’s plea seeking restoration of the position that existed before the Centre imposed ceiling on all the borrowings of the plaintiff-State, the Supreme Court has observed that if the State has essentially created financial hardship because of its own financial mismanagement, such hardship cannot be held to be an irreparable injury that would necessitate an interim relief against the Union.

The State of Kerala had instituted this Original Suit under Article 131 of the Constitution  against the Union of India, challenging the amendment made to Section 4 of the Fiscal Responsibility and Budget Management Act, whereby the Central Government was obligated to ensure that the aggregate debt of the Central Government and the State Governments does not exceed sixty percent of the gross domestic product by the end of Financial Year (F.Y.) 2024-25. The Defendant had accorded its consent to the Plaintiff to raise open market borrowing of INR 1,330 crores. It was also noted that the total open market borrowing allowed to the Plaintiff for the F.Y. 2023-24 was INR 21,852 crores.

The suit had been filed on the premise that by undertaking the Impugned Actions, the Defendant - Union of India had exceeded its power under Article 293 of the Constitution of India. The Plaintiff -State also sought interim injunction to mandate Union of India to restore the position that existed before the Defendant imposed ceiling on all the borrowings of the Plaintiff and to enable the Plaintiff to borrow INR 26,226 crores on an immediate basis.

At the outset, the Division Bench of Justice Surya Kant & Justice K.V. Viswanathan referred certain issues to a Bench comprising five judges. These issues were regarding regulation of borrowings under Article 293, borrowing by State-Owned Enterprises and liabilities arising out of the Public Account and fiscal decentralization as an aspect of Indian Federalism.

Next issue before the Bench was whether the plaintiff State can be granted the ad-interim injunction. The Bench highlighted the Triple-Test followed by the Courts across the jurisdictions as the pre-requisites before a party can be mandatorily injuncted to do or to refrain from doing a particular thing. These three cardinal factors are a ‘Prima facie case’, which necessitates that as per the material placed on record, the plaintiff is likely to succeed in the final determination of the case. ‘Balance of convenience’, such that the prejudice likely to be caused to the plaintiff due to rejection of the interim relief will be higher than the inconvenience that the defendant may face if the relief is so granted; and ‘Irreparable injury’, which means that if the relief is not granted, the plaintiff will face an irreversible injury that cannot be compensated in monetary terms.

The Bench also stated the difference between prohibitory and mandatory injunction by explaining that the former seeks to restrain the defendant from doing something, whereas the latter compels the defendant to take a positive step. Placing reliance upon Dorab Cawasji Warden v. Coomi Sorab Warden [LQ/SC/1990/77], it was highlighted that the Courts are, relatively more cautious in granting mandatory injunction as compared to prohibitory injunction and thus, require the plaintiff to establish a stronger case.

The plaintiff– State, in the present matter, had sought mandatory injunction and not a prohibitory one. “Instead of arguing that the Defendant – Union of India should refrain from imposing a Net Borrowing Ceiling during the next F.Y., the Plaintiff has applied for a backward-looking injunction, i.e., for an injunction to undo the imposition of the Net Borrowing Ceiling that covered various liabilities and to restore the position that existed before such ceiling. Hence, the Plaintiff is required to meet a higher standard for the triple-test of interim relief…”, the Bench said.

The Top Court, prima facie, was inclined to accept the argument of the Union that where there is over-utilization of the borrowing limit in the previous year, to the extent of over-borrowing, deductions are permissible in the succeeding year, even beyond the award period of the 14th Finance Commission.

It was also noted that it was admitted by the Plaintiff – State that there had been over-borrowing/over-utilization of the borrowing limit between the F.Ys. 2017-18 and 2019-20. It was not denied that if, as contended by the Union, such over-borrowings are adjustable in the succeeding years, then the State has already exhausted its borrowing limits for the F.Y. 2023-24. “We find, prima facie, that there is a difference in the mechanism which operates when there is under-utilization of borrowing and when there is over-utilization of borrowing. The Plaintiff – State has not been able to demonstrate at this stage that even after adjusting the over-borrowings of the previous year, there is fiscal space to borrow”, it added.

The Bench also found merit in the submission of the Union of India that after inclusion of off budget borrowing for F.Y. 2022-23 and adjustments for over-borrowing of past years, the State had no unutilized fiscal space and the State had over-utilized its fiscal space. “Hence, we are unable to accept the argument of the Plaintiff at the interim stage that there is fiscal space of unutilized borrowing of either INR 10,722 crores as was orally prayed during the hearing or INR 24,434 Crores which was the borrowing claimed in the negotiations with the Union”, it said while observing that the Plaintiff – State had not established a prima facie case to the extent required in the instant suit.

The Top Court was of the view that the mischief that is likely to ensue in the event of granting the interim relief, will be far greater than rejecting the same. As per the Bench, the balance of convenience, thus, clearly lied in favour of the Defendant – Union of India. It was also opined that the Plaintiff – State had sought to equate ‘financial hardship’ with ‘irreparable injury’ as ‘monetary damage’ is not an irreparable loss, when the Court can always balance the equities in its final outcome by ensuring that pending claims are adjusted along with resultant additional liability on the opposite party.

The Union stated that the Plaintiff had the highest ratio of Pension to Total Revenue Expenditure among all States and required urgent measures to reduce its expenditure. Instead of doing so, the Plaintiff was borrowing more funds to meet its day-to- day expenses such as salaries and pensions. “If the State has essentially created financial hardship because of its own financial mismanagement, such hardship cannot be held to be an irreparable injury that would necessitate an interim relief against Union. There is an arguable point that if we were to issue interim mandatory injunction in such like cases, it might set a bad precedent in law that would enable the States to flout fiscal policies and still successfully claim additional borrowings”, it said.

Noting that the Plaintiff had secured substantial relief during the pendency of this interim application, the Bench opined, “Further, vide circulars dated 08.03.2024 and 19.03.2024, the Union has accorded consent for INR 8,742 crores and INR 4,866 crores respectively, which comes to a sum total of INR 13,608 crores.” The Top Court, thus, held that the State of Kerala was not entitled to the interim injunction, as prayed for.