In a tussle between the State of Kerala and the Union Government over borrowing limits, the Supreme Court rendered a pivotal decision, shedding light on the delicate balance between state autonomy and national fiscal responsibility. 

The case, which centered on Kerala's challenge against the imposition of a 'Net Borrowing Ceiling' by the Union, underscored the judiciary's role in adjudicating complex constitutional and fiscal matters.

At the heart of the dispute lay the interpretation of Article 293, which pertains to the borrowing powers of states vis-à-vis the regulatory authority of the central government. 

Kerala, represented by Senior Advocate Kapil Sibal, contested the Union's imposition of borrowing limits, arguing that it encroached upon the state's fiscal autonomy and hindered its ability to meet financial obligations and pursue developmental agendas.

The Union Government, represented by Attorney General R Venkatramani, countered Kerala's claims, asserting its authority to regulate state borrowings in the interest of maintaining fiscal stability and national economic health. 

Central to the Union's argument was the contention that Kerala's previous fiscal mismanagement, evidenced by over-borrowing in past years, warranted regulatory intervention to curb potential financial risks.

The Supreme Court, in its ruling delivered by Justices Surya Kant and K.V. Vishwanathan, elucidated a three-pronged test for granting injunction orders, emphasizing the need for a prima facie case, balance of convenience, and demonstration of irreparable injury. 

While acknowledging Kerala's substantive constitutional questions and the potential implications of the borrowing ceiling on state finances, the Court scrutinized the state's assertions through the lens of this triple test.

Crucially, the Court found that Kerala failed to satisfy each component of the triple test.

Firstly, 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;

Secondly, ‘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; 

Finally, ‘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 Court's decision to deny Kerala's plea for interim relief underscored the imperative of fiscal prudence and responsibility in governance. It highlighted the broader national interest in maintaining fiscal stability and adherence to fiscal policies, as enshrined in statutes such as the Kerala Fiscal Responsibility Act, 2003.

Moreover, the Court's distinction between prohibitory and mandatory injunctions elucidated the differing standards of scrutiny applied to each. While prohibitory injunctions restrain future actions, mandatory injunctions compel parties to undo past actions. 

In this instance, Kerala sought a mandatory injunction to revoke the borrowing ceiling, which required a higher threshold of justification.

By upholding the Union's regulatory authority over state borrowings and emphasizing the importance of fiscal discipline, the Supreme Court's ruling set a precedent for prudent fiscal management and judicial restraint. It cautioned against setting precedents that could undermine fiscal policies and empower states to flout regulatory measures with impunity.

Case: State of Kerala v. Union of India,

Original Suit No. 1 of 2024.

Click to read/download judgment.