State's challenge to Net Borrowing Ceiling restrictions dismissed after admitting over-borrowing in previous years

The SC dismissed the plaintiff state's application for ad-interim injunction against the Central Government's imposition of Net Borrowing Ceiling restrictions. The court held that the state failed to establish a prima facie case, as it admitted to over-borrowing between FY 2017-18 and 2019-20, and could not demonstrate available fiscal space after adjusting previous over-borrowings. The SC found merit in the Union's contention that after including off-budget borrowing and past adjustments, the state had exhausted its borrowing limits for FY 2023-24. The court noted that Article 293's interpretation regarding Central Government's constitutional power over state borrowing lacked authoritative precedent, preventing acceptance of the state's restrictive reading at face value. The appeal was disposed of.

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Issues Involved:
1. Constitutionality of Amendment Act No. 13 of 2018.
2. Legality of the Net Borrowing Ceiling imposed by the Union of India.
3. Interpretation and scope of Article 293 of the Constitution.
4. Interim injunction for immediate borrowing relief.

Summary:

Constitutionality of Amendment Act No. 13 of 2018:
The Plaintiff, State of Kerala, challenged the Amendment Act No. 13 of 2018, which amended Section 4 of the Fiscal Responsibility and Budget Management Act, 2003. The amendment mandates that the aggregate debt of the Central and State Governments should not exceed sixty percent of the GDP by the end of FY 2024-25.

Legality of the Net Borrowing Ceiling:
The Plaintiff contested the imposition of a 'Net Borrowing Ceiling' by the Union of India through Letter No. 40(1)/PF-S/2023-24, which restricted the Plaintiff's borrowing to three percent of the projected GSDP for FY 2023-24, amounting to INR 32,442 crores. The ceiling included all sources of borrowings and was also applied to State-Owned Enterprises to prevent bypassing the ceiling.

Interpretation and Scope of Article 293:
The Plaintiff argued that the Union of India exceeded its power u/s 293 of the Constitution by regulating all borrowings of a State and imposing conditions beyond loans sought from the Central Government. The Defendant contended that managing public finance is a national issue, and the Union has the authority to regulate State borrowings to maintain fiscal health. Various questions of constitutional interpretation were raised, including whether Article 293 vests a State with an enforceable right to raise borrowing and if liabilities from Public Account and State-Owned Enterprises fall under Article 293(3).

Interim Injunction for Immediate Borrowing Relief:
The Plaintiff sought an interim injunction to restore the pre-ceiling borrowing position and enable immediate borrowing of INR 26,226 crores. The Court evaluated the request based on the Triple-Test principles: prima facie case, balance of convenience, and irreparable injury. The Plaintiff failed to establish a prima facie case as there was over-utilization of borrowing limits in previous years, and the Plaintiff did not demonstrate fiscal space for additional borrowing. The balance of convenience favored the Defendant, as granting the interim relief could jeopardize the fiscal health of the country. The Court found that financial hardship does not equate to irreparable injury, as monetary damages can be compensated later.

Conclusion:
The Supreme Court referred the substantial constitutional questions to a Bench of five judges for authoritative interpretation. Pending the final decision, the Plaintiff's request for an interim injunction was denied as they failed to meet the required legal standards. The main case was directed to be placed before the Chief Justice of India for the constitution of an appropriate Bench.

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