* Author
[2024] 4 S.C.R. 13 : 2024 INSC 253
State of Kerala
v.
Union of India
(Original Suit No. 1 of 2024)
01 April 2024
[Surya Kant* and K.V. Viswanathan, JJ.]
Issue for Consideration
What is the true import and interpretation of the expression “if and in
so far as the dispute involves any question (whether of law or fact)
on which the existence or extent of a legal right depends” contained
in Article 131 of the Constitution; Does Article 293 of the Constitution
vest a State with an enforceable right to raise borrowing from the
Union government and/or other sources and if yes, to what extent
such right can be regulated by the Union government; Can the
borrowing by State-Owned Enterprises and liabilities arising out of
the Public Account be included under the purview of Article 293(3);
What is the scope and extent of Judicial Review exercisable by this
Court with respect to a fiscal policy purportedly in conflict with the
object and spirit of Article 293; Is fiscal decentralization an aspect of
Indian Federalism and if yes, do the impugned actions taken by the
Defendant-Union of India purportedly to maintain the fiscal health of
the country violate such Principles of Federalism; Are the impugned
actions violative of Article 14 of the Constitution on the ground of
‘manifest arbitrariness’ or on the basis of differential treatment meted
out to the Plaintiff-State vis-à-vis other States; What has been the
past practice regarding regulation of the Plaintiff’s borrowing by the
Defendant; If such practice has been restrictive of Plaintiff’s borrowings,
can it estop the Plaintiff from bringing the present suit; Conversely, if
such practice has not been restrictive, can it serve as the basis for
the Plaintiff’s legitimate expectations against the Defendant; Are the
restrictions imposed by the impugned actions in conflict with the role
assigned to the Reserve Bank of India as the public debt manager
of the Plaintiff; Is it mandatory to have prior consultation with States
for giving effect to the recommendations of Finance Commission.
Headnotes
Constitution of India – Article 293 – Borrowing by States –
Union of India inter alia imposed Net Borrowing Ceiling on the
14 [2024] 4 S.C.R.
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State of Kerala, to restrict its maximum possible borrowing –
Suit filed by State of Kerala on the premise that by undertaking
the impugned actions, Union of India imposed ceiling on all
its borrowings, and exceeded its power u/Article 293 – It also
sought interim injunction, inter alia, to mandate Union of India
to restore the position that existed before it imposed ceiling
on all its borrowings; and to enable it to borrow INR 26,226
crores on an immediate basis:
Held: Since Article 293 has so far not been the subject of any
authoritative interpretation by this Court, the questions arising in
the present suit squarely fall within the ambit of Article 145(3) of
the Constitution – Questions referred to Constitution Bench of five
judges – Matter be placed before Hon’ble the Chief Justice of India
for constitution of an appropriate Bench – Further, the Plaintiff-State
also sought mandatory injunction and hence, was required to meet
a higher standard for the triple-test of interim relief – Prima facie, the
argument of the Union is accepted that where there is over-utilization
of the borrowing limit in the previous year, to the extent of overborrowing, deductions are permissible in the succeeding year, even
beyond the award period of the 14th Finance Commission– Plaintiff
failed to establish a prima facie case regarding its contention on
under-utilization of borrowing – The mischief that is likely to ensue
in the event of granting the interim relief, will be far greater than
rejecting the same – Balance of convenience clearly lies in favour
of the Union of India – Plaintiff sought to equate ‘financial hardship’
with ‘irreparable injury’ – Prima facie ‘monetary damage’ is not an
irreparable loss, as 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 – 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 – Since
the Plaintiff-State failed to establish the three prongs of proving
prima facie case, balance of convenience and irreparable injury, it
is not entitled to the interim injunction. [Paras 8, 10, 27, 28, 32, 33]
Injunctions – Mandatory injunctions vis-à-vis prohibitory
injunctions – Triple-Test – Prima facie case; Balance of
convenience; Irreparable injury – Standard of scrutiny in
applying these parameters for ‘prohibitory’ and ‘mandatory’
injunctions:
[2024] 4 S.C.R. 15
State of Kerala v. Union of India
Held: Prohibitory injunctions vary from mandatory injunctions in
terms of the nature of relief sought – While the former seeks to
restrain the defendant from doing something, the latter compels
the defendant to take a positive step – Prohibitory injunctions are
forward-looking as they seek to restrict a future course of action –
Conversely, mandatory injunctions are backward-looking because
they require the defendant to take an active step and undo the past
action– Courts are, therefore, relatively more cautious in granting
mandatory injunction as compared to prohibitory injunction and
thus, require the plaintiff to establish a stronger case – In the
present case, the Plaintiff 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 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, was required to meet a
higher standard for the triple-test of interim relief. [Paras 13-15]
Words and Phrases – “if and in so far as the dispute involves
any question (whether of law or fact) on which the existence
or extent of a legal right depends” in Article 131 of the
Constitution of India.
List of Acts
Constitution of India; Fiscal Responsibility and Budget Management
Act, 2003; Kerala Fiscal Responsibility Act, 2003.
List of Keywords
Borrowing by States; Ceiling on borrowings; Mandatory injunctions;
Prohibitory injunctions; Triple-test of interim relief; Prima facie
case; Balance of convenience; Irreparable injury; Fiscal policy;
Federalism; Finance Commission.
Case Arising From
ORIGINAL JURISDICTION : Original Suit No. 1 of 2024
Original Suit has been instituted under Article 131 of the Constitution
of India
With
I.A. No. 6149 of 2024
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Appearances for Parties
K. Gopalakrishna Kurup, A.G., Kapil Sibal, Sr. Adv., C. K. Sasi, V.
Manu, Ms. Meena K Poulose, Ms. Anusha Nagarajan, Ms. Aparajita
Jamwal, Ms. Manisha Singh, Rishabh Parikh, Ms. Sumedha Sarkar,
Ms. Rupali Samuel, Advs. for the Plaintiff.
R Venkatramani, Attorney General for India, N Venkatraman, A.S.G.,
Raj Bahadur Yadav, Sonali Jain, Chitvan Singhal, Raman Yadav,
Kartikay Aggarwal, Abhishek Kumar Pandey, Ms. Ameyvikrama
Thanvi, Mukesh Kumar Singh, Advs. for the Defendant.
Judgment / Order of the Supreme Court
Order
Surya Kant, J.
1. State of Kerala has instituted this Original Suit under Article 131 of
the Constitution of India against the Union of India, challenging, inter
alia, the following (collectively, the “Impugned Actions”):
(a) Amendment Act No. 13 of 2018 (dated 28.03.2018):
By this Amendment Act, the Parliament has amended Section 4 of
the Fiscal Responsibility and Budget Management Act, 2003, whereby
the Central Government is 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;
(b) Letter No. 40(1)/PF-S/2023-24 (dated 27.03.2023):
Through this letter, the Defendant has imposed a ‘Net Borrowing
Ceiling’ on the Plaintiff - State, to restrict the maximum possible
borrowing that Plaintiff could make under law. This ceiling was
quantified as three percent of the projected Gross State Domestic
Product (GSDP) for the F.Y. 2023-24, which came to INR 32,442
crores. This Net Borrowing Ceiling covered all sources of
borrowings, including open market borrowings, loans from Financial
Institutions, and the liabilities arising out of the Public Account of
the Plaintiff. Additionally, to prevent the States from by-passing
the Net Borrowing Ceiling by using State-Owned Enterprises,
the ceiling has also been applied to certain borrowings by such
enterprises; and
[2024] 4 S.C.R. 17
State of Kerala v. Union of India
(c) Letter No. 40(12)/PF-S/2023-24/OMB-52 (dated 11.08.2023):
In this letter, the Defendant has accorded its consent to the Plaintiff
to raise open market borrowing of INR 1,330 crores. It has also noted
that the total open market borrowing allowed to the Plaintiff for the
F.Y. 2023-24 was INR 21,852 crores.
2. The instant suit has been filed on the premise that by undertaking the
Impugned Actions, the Defendant - Union of India has exceeded its
power under Article 293 of the Constitution of India, which provides:
“293. Borrowing by States.—
(1) Subject to the provisions of this article, the executive
power of a State extends to borrowing within the
territory of India upon the security of the Consolidated
Fund of the State within such limits, if any, as may
from time to time be fixed by the Legislature of such
State by law and to the giving of guarantees within
such limits, if any, as may be so fixed.
(2) The Government of India may, subject to such
conditions as may be laid down by or under any
law made by Parliament, make loans to any State
or, so long as any limits fixed under article 292 are
not exceeded, give guarantees in respect of loans
raised by any State, and any sums required for the
purpose of making such loans shall be charged on
the Consolidated Fund of India.
(3) A State may not without the consent of the Government
of India raise any loan if there is still outstanding any
part of a loan which has been made to the State
by the Government of India or by its predecessor
Government, or in respect of which a guarantee
has been given by the Government of India or by
its predecessor Government.
(4) A consent under clause (3) may be granted subject
to such conditions, if any, as the Government of India
may think fit to impose.”
3. Besides the afore-mentioned final relief in the suit, the Plaintiff -State
also seeks interim injunction, inter alia, to mandate Union of India:
(a) to restore the position that existed before the Defendant imposed
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ceiling on all the borrowings of the Plaintiff; and (b) to enable the
Plaintiff to borrow INR 26,226 crores on an immediate basis.
4. We have heard Mr. Kapil Sibal, Ld. Senior Advocate, for the Plaintiff
- State, and Mr. R. Venkataramani, Ld. Attorney General for India
and Mr. N. Venkataraman, Ld. Additional Solicitor General of India,
on behalf of the Defendant – Union of India at a considerable length,
and have perused the Plaint and other documents on record on the
issue of maintainability of suit as well as the interim relief sought by
the Plaintiff - State.
5. In support of its prayer for the interim injunction, the Plaintiff - State has
mainly urged that: (i) under Article 293 of the Constitution, the Union
of India does not have the power to regulate all the borrowings of a
State and conditions can be imposed only on the loans sought from the
Central Government; (ii) the liabilities arising out of the Public Account
and State-Owned Enterprises cannot be included in the borrowings
of the Plaintiff; (iii) the Plaintiff – State is in dire need of INR 26,226
crores to pay dues arising out of various budgetary obligations including
dearness allowance, pension scheme, subsidies, etc.; (iv) there has
been under-utilization of permissible borrowing space from previous
years, which the Plaintiff should be allowed to use now; (v) the overborrowing from the years before F.Y. 2023-24 cannot be adjusted from
the Net Borrowing Ceiling of this F.Y. and must instead be repaid at
the date of maturity of such borrowing; and (vi) the debt is sustainable
because it satisfies the Domar model, such that the GSDP of the
Plaintiff – State is rising faster than the effective interest rate.
6. Per contra, the Defendant – Union of India controverted the Plaintiff’s
interim claim and has argued that: (i) since management of public
finance is a national issue, the Union of India has the power to
regulate all the borrowings of the Plaintiff - State to maintain the fiscal
health of the country; (ii) the liabilities arising out of Public Account
and State-Owned enterprises can be included in the borrowings
of the Plaintiff since they may be used to by-pass the borrowing
ceiling; (iii) the pending dues have arisen on account of the fiscal
mismanagement by the State of Kerala and are not a consequence
of regulation of borrowing by the Union of India; (iv) the Plaintiff’s
contention regarding under-utilized borrowing space from the previous
years is based on erroneous facts; (v) the over-borrowing done in
a F.Y. has to be adjusted against the borrowing amount of the next
[2024] 4 S.C.R. 19
State of Kerala v. Union of India
F.Ys.; and (vi) the fiscal health of the country will be jeopardized if
the Plaintiff – State is allowed to undertake more debt.
7. On a critical analysis of the contentions of both the sides, it seems
to us that the instant suit raises more than one substantial questions
regarding interpretation of the Constitution, including:
(a) What is the true import and interpretation of the following
expression contained in Article 131 of the Constitution: “if
and in so far as the dispute involves any question (whether
of law or fact) on which the existence or extent of a legal
right depends”?
(b) Does Article 293 of the Constitution vest a State with an
enforceable right to raise borrowing from the Union government
and/or other sources? If yes, to what extent such right can be
regulated by the Union government?
(c) Can the borrowing by State-Owned Enterprises and liabilities
arising out of the Public Account be included under the purview
of Article 293(3) of the Constitution?
(d) What is the scope and extent of Judicial Review exercisable by
this Court with respect to a fiscal policy, which is purportedly in
conflict with the object and spirit of Article 293 of the Constitution?
8. Since Article 293 of the Constitution has not been so far the subject
to any authoritative interpretation by this Court, in our considered
opinion, the aforesaid questions squarely fall within the ambit of
Article 145(3) of the Constitution. We, therefore, deem it appropriate
to refer these questions for pronouncement by a Bench comprising
five judges.
9. In addition, and as a necessary corollary to these questions, it appears
that on merits also, various questions of significant importance
impacting the Federal Structure of Governance as embedded in our
Constitution, like, the following, arise for consideration:
(a) Is fiscal decentralization an aspect of Indian Federalism? If yes,
do the Impugned Actions taken by the Defendant purportedly to
maintain the fiscal health of the country violate such Principles
of Federalism?
(b) Are the Impugned Actions violative of Article 14 of the
Constitution on the ground of ‘manifest arbitrariness’ or on the
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basis of differential treatment meted out to the Plaintiff vis-à-vis
other States?
(c) What has been the past practice regarding regulation of the
Plaintiff’s borrowing by the Defendant? If such practice has
been restrictive of Plaintiff’s borrowings, can it estop the Plaintiff
from bringing the present suit? Conversely, if such practice has
not been restrictive, can it serve as the basis for the Plaintiff’s
legitimate expectations against the Defendant - Union of India?
(d) Are the restrictions imposed by the Impugned Actions in conflict
with the role assigned to the Reserve Bank of India as the
public debt manager of the Plaintiff?
(e) Is it mandatory to have prior consultation with States for giving
effect to the recommendations of Finance Commission?
10. The Registry is accordingly directed to place this matter before Hon’ble
the Chief Justice of India for the constitution of an appropriate Bench
to answer the aforementioned questions and/or such other issues
as may be identified by the Five-Judge Bench.
11. We may now advert to the issue as to whether, pending the decision
on the questions formulated above, the Plaintiff – State can be
granted the ad-interim injunction as briefly noticed in paragraph 3
of this Order?
12. The globally acknowledged golden principles, collectively known as
the Triple-Test, are 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,
that are deeply embedded in the Indian jurisprudence as well, are:
(a) 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;
(b) ‘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
(c) ‘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.
[2024] 4 S.C.R. 21
State of Kerala v. Union of India
13. At this juncture, it is necessary to distinguish the standard of scrutiny in
applying these parameters for ‘prohibitory’ and ‘mandatory’ injunctions.
Prohibitory injunctions vary from mandatory injunctions in terms of the
nature of relief that is sought. While the former seeks to restrain the
defendant from doing something, the latter compels the defendant to
take a positive step.1
For instance, hypothetically, in the context of a
construction dispute, if a plaintiff seeks to prevent the defendant from
demolishing a structure, it would be deemed a prohibitory injunction.
Whereas, if a plaintiff wants to compel the defendant to demolish a
structure, then this would amount to mandatory injunction.
14. In that sense, prohibitory injunctions are forward-looking, such that
they seek to restrict a future course of action. Conversely, mandatory
injunctions are backward-looking, because they require the defendant
to take an active step and undo the past action.2
Since mandatory
injunctions require the defendant to take a positive action instead of
merely being restrained from performing an act, they carry a graver
risk of prejudice for the defendant if the final outcome subsequently
turns out to be in its favour. For instance, in the example above,
preventing the demolition of a structure for the time being cannot be
perceived to be on the same pedestal as mandating the demolition
of a construction. While the former may still be undone, i.e., the
defendant may still be compelled to demolish the structure should the
plaintiff succeeds in his final claim, undoing the latter, i.e., rebuilding
the construction, would cause graver injustice. The Courts are,
therefore, relatively more cautious in granting mandatory injunction
as compared to prohibitory injunction and thus, require the plaintiff
to establish a stronger case.3
15. Reverting to the facts of the case in hand, the Plaintiff – State has
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,
1 State of Haryana v. State of Punjab, (2004) 12 SCC 673, para 37-38.
2 Shepherd Homes Ltd. v. Sandham, [1970] 3 WLR 348.
3 Id., Dorab Cawasji Warden v. Coomi Sorab Warden, (1990) 2 SCC 117, para 16.
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the Plaintiff is required to meet a higher standard for the triple-test of
interim relief as mentioned in paragraph 12 above of this order.
16. Coming to the first factor, i.e., the prima facie case, the Plaintiff
– State has raised various substantive questions of constitutional
interpretation. Generally speaking, the phrase ‘prima facie case’ is
not a term of art and it simply signifies that at first sight the plaintiff
has a strong case. According to Webster’s International Dictionary,
‘prima facie case’ means a case established by ‘prima facie evidence’,
which in turn means the evidence that is sufficient in law to raise a
presumption of fact unless rebutted.
17. The Plaintiff – State has argued that based on the States Finance
Accounts audited by the Comptroller and Auditor General of India
and the achievements of the fiscal deficit targets, the Plaintiff – State
has under-utilized permissible borrowing space in the last three F.Ys.
(2020-21, 2021-22 and 2022-23) to the extent of INR 24,434 crores.
The Plaintiff – State contends that even going by the stand of the
Union, the under-utilized space of the Plaintiff for the said period
borrowings is INR 10,722 crores, which it should be allowed to borrow.
18. Mr. Kapil Sibal, learned Senior Counsel for the Plaintiff – State,
submitted that under the recommendations of the 15th Finance
Commission, the State is entitled to borrow up to the maximum
permissible fiscal deficit for the year. He relied on paragraphs 12.64
and 12.65 of the Report of the 15th Finance Commission, which read
as under:
“12.64 If a State is not able to fully utilise its sanctioned
borrowing limit, as specified above, in any particular
year during the first four years of our award period
(2021-22 to 2024 -25), it will have the option of availing
this unutilised borrowing amount (calculated in rupees)
in any of the subsequent years within our award period.
12.65 Based on these assumptions, we have worked
out the debt path for States, as presented in Table 12.4.
Since all estimated revenue deficits are met by equivalent
provision of revenue deficit grant, the revenue surpluses
run by the States are reflected by the negative numbers
on revenue deficit presented in the table. The State debt
in aggregate tapers off gradually after 2022-23. This is
[2024] 4 S.C.R. 23
State of Kerala v. Union of India
similar to the pattern in the debt path of the Union shown
in Table 12.2. The State-specific indicative debt paths are
given in Annex 12.1.
Table 12.4: Indicative Deficit and Debt Path for State
Governments
(% of GSDP)
2020-21 2021-22 2022-23 2023-24 2024-25 2025-26
Revenue
deficit*
-0.1 -0.5 -0.8 -1.2 -1.7 -2.5
Fiscal
deficit
4.5 4.0 3.5 3.0 3.0 3.0
Total
liabilities
33.1 32.6 33.3 33.1 32.8 32.5
*negative values indicate surplus and positive values
indicate deficit
Note: While arriving at the total liabilities of States for the
year 2021-22, an aggregate fiscal deficit of 3.5 per cent
of GSDP is taken because some States may not avail of
the full unconditional net borrowing space of 4 per cent.”
19. According to the learned Senior Counsel, since the fiscal deficit for
2023-24 is 3% of GSDP, they should be allowed the full borrowing
without any restrictions.
20. Mr. N. Venkataraman, learned ASG, controverted the submission of
the Plaintiff – State. According to learned ASG, while the figures as
projected by the State are themselves in dispute, the State is not
entitled to borrow the amounts as claimed since the over-borrowing
by the State of Kerala from F.Ys. 2016-17 to 2019-20 is INR 14,479
crores. According to him, if these over-borrowings are factored in the
borrowing space, it will be found that the State has not under-utilized
but over-utilized its borrowing capacity by INR 2,941.82 crores till
F.Y. 2022-23. The learned ASG, relying on paragraph 14.64 of the
Report of the 14th Finance Commission, contended that if the State
is not able to fully utilize its sanctioned borrowings limit of 3% of
GSDP in any particular year during the first four years of the award
period (2015-16 to 2018-19), the State will have the option of availing
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this un-utilized borrowing amount (calculated in Rupees) only in the
following year within the award period. However, there is a difference
between under-utilization of the borrowing limit and over-utilization
of the borrowing limit. Learned ASG maintained that over-utilization
is dealt with in Annexure 14.2 of Chapter-XIV in the Report of the
14th Finance Commission, which clearly prescribes as under:
“Case II. Over-utilizing the borrowing amount:
If a State, in a given year, borrows over and above the
sanctioned borrowing limit by x amount, then in the
succeeding year, the same x amount of the previous
year will be deducted from the States borrowing limit of
that year.”
21. According to learned ASG, the Plaintiff – State is wrong in contending
that such deduction in the succeeding year can only be made within
the award period of the 14th Finance Commission. He explained that
over-borrowings of the previous year were adjusted for the F.Ys.
2021-22, 2022-23 and 2023-24 (as on date) to the tune of INR
9,197.15 crores, INR 13,067.78 crores and INR 4,354.72 crores
respectively. According to learned ASG, the State was fully conscious
of the correct position in law and had rightly acquiesced in the
adjustments of the over-borrowings. Having acquiesced, it does not
lie in the mouth of the Plaintiff – State to contend that once the period
for the 15th Finance Commission has set in from F.Ys. 2021-22 to
2025-26, the over-borrowings of the previous years have absolutely
no relevance. Learned ASG vehemently argued that the Plaintiff is
wrong in contending that a reading of the report of the 14th and 15th
Finance Commission indicates that for both under-utilization and
over-utilization, all adjustments have to be made within the period
covered by the Report of the Commission.
22. Prima facie, we are 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. This is, however, a matter which will have to
be finally decided in the suit.
23. At this stage, based on the contentions of the Plaintiff – State with
which we are not prima facie convinced, permitting any borrowing—
[2024] 4 S.C.R. 25
State of Kerala v. Union of India
whether INR 24,434 crores as claimed in the written note or INR
10,722 crores as alternatively claimed—would not be tenable.
24. In fact, it has been admitted by the Plaintiff – State that there has
been over-borrowing/over-utilization of the borrowing limit between
the F.Ys. 2017-18 and 2019-20. It is 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.
25. 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.
26. Our attention has also been invited to the Kerala Fiscal Responsibility
Act, 2003. The Act is enacted to provide for the responsibility of the
government to ensure prudence in fiscal management and fiscal
stability by progressive elimination of revenue deficit and sustainable
debt management consistent with fiscal stability, greater transparency
in fiscal operations of the government and conduct of fiscal policy
in a medium term fiscal framework and for matters connected there
with and incidental thereto. The Preamble of the Act also states
that it was felt expedient to provide for the responsibility of the
government to ensure prudence in fiscal management and fiscal
stability by progressive elimination of revenue deficit and sustainable
debt management consistent with fiscal stability.
27. In view of above, we find prima facie 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
has no unutilized fiscal space and that the State has 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.
28. Therefore, the Plaintiff – State has failed to establish a prima facie
case regarding its contention on under-utilization of borrowing.
Further, with respect to its other contentions, while the Plaintiff
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has sought to construe Article 293 restrictively to limit the Central
government’s power only to the loans granted by it, the Defendant
has contended that if Article 293 is read in such a manner, it would
render this provision redundant as the Central Government has an
inherent power as a lender to impose conditions on such loans even
in the absence of any express constitutional provision. Similarly, the
Defendant has contested the Plaintiff’s narrow reading of the term
‘borrowing’ and has argued that off-budget borrowings could also
be included in the same if they are used to by-pass the conditions
imposed under Article 293 of the Constitution.
29. Since this Article has not been the subject of an authoritative
pronouncement of this Court so far, we cannot readily accept the
Plaintiff’s contention over the Defendant’s interpretation by taking it
on face value. In this regard, we have referred the matter to a larger
bench of five judges, as mentioned in paragraph 10 of this order.
30. Hence, on consideration of the limited material available on record
so far, the Plaintiff – State has not established a prima facie case
to the extent required in the instant suit.
31. With respect to the second prong for claiming the interim relief,
the Plaintiff – State has argued that if the interim injunction is not
granted, it is likely to face extreme financial hardship on account of
its pending dues. As against this, the Defendant – Union of India
has highlighted the grave consequences regarding the fiscal health
of the country if the Plaintiff is allowed the interim relief. The Union
of India has argued that additional borrowing by the State will have
spill-over effects and may raise the prices of borrowing in the market,
possibly crowding out the borrowing by private investors. This may
then have an adverse impact on the production of goods and services
in the market, possibly affecting the economic well-being of every
citizen. Since the Central government borrows money from outside
the country and lends money to the State governments, borrowings of
the States are intricately linked to the creditworthiness of the country
in the international market. Hence, the Union of India argued that
in case such borrowings by State Governments are not regulated,
it may negatively impact the macro-economic growth and stability
of the entire nation.
32. On a comparative evaluation of the submissions, it seems to us that
the mischief that is likely to ensue in the event of granting the interim
[2024] 4 S.C.R. 27
State of Kerala v. Union of India
relief, will be far greater than rejecting the same. If we grant the
interim injunction and the suit is eventually dismissed, turning back
the adverse effects on the entire nation at such a large scale would
be nearly impossible. Au contraire, if the interim relief is declined at
this stage and the Plaintiff - State succeeds subsequently in the final
outcome of the suit, it can still pay the pending dues, may be with
some added burden, which can be suitably passed on the judgment
- debtor. The balance of convenience, thus, clearly lies in favour of
the Defendant – Union of India.
33. Finally, as regards to the third pre-condition, we find that the Plaintiff
– State has sought to equate ‘financial hardship’ with ‘irreparable
injury’. It appears prima facie that ‘monetary damage’ is not an
irreparable loss, as 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.
34. We may hasten to remind ourselves at this stage that according to
the Defendant-Union of India, the Plaintiff – State is apparently a
highly debt stressed State that has mismanaged its finances. This
statement, however, is strongly refuted by the State. According to the
Union, the Plaintiff has the highest ratio of Pension to Total Revenue
Expenditure among all States and requires urgent measures to
reduce its expenditure. Instead of doing so, the Plaintiff is borrowing
more funds to meet its day-to-day expenses such as salaries and
pensions. Accordingly, the Defendant has contended that the financial
hardship is not attributable to the regulation of Plaintiff’s borrowing
and is actually a consequence of its own actions. Furthermore,
the Defendant maintains that restriction on the borrowing is a step
towards the betterment of fiscal health of the State because if such
borrowings are not restricted, the Plaintiff’s position will become
more precarious, leading to a vicious cycle of deteriorating financial
health and increased borrowing to repair the same.
35. 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.
28 [2024] 4 S.C.R.
Digital Supreme Court Reports
36. In any case, we cannot be oblivious of the fact that in light of
the Plaintiff’s contention regarding pending financial dues, the
Defendant has already made an offer to allow additional borrowing.
In a meeting dated 15.02.2024, the Defendant first offered consent
for INR 13,608 crores, out of which INR 11,731 crore was subject
to the pre-requisite of withdrawal of the suit, a condition that we
disapproved of. Subsequently, in a meeting dated 08.03.2024, the
Union offered a consent for INR 5,000 crores. 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. Even if we assume that the
financial hardship of the Plaintiff is partly a result of the Defendant’s
Regulations, during the course of hearing this interim application,
the concern has been assuaged by the Defendant – Union of India
to some extent so as to bail out the Plaintiff – State from the current
crisis. The Plaintiff thus has secured substantial relief during the
pendency of this interim application.
37. To sum up, we are of the view that since the Plaintiff – State has
failed to establish the three prongs of proving prima facie case,
balance of convenience and irreparable injury, State of Kerala is not
entitled to the interim injunction, as prayed for.
38. In light of the above observations, I.A. No. 6149 of 2024 is disposed off.
39. It is clarified that the observations made hereinabove are for the
limited purpose of deciding the prayer for ad-interim injunction and
shall have no bearing on the final outcome of the Original Suit.
40. The main case be placed before Hon’ble the Chief Justice of India
for constitution of an appropriate Bench.
Headnotes prepared by: Divya Pandey Result of the case:
Matter referred to Larger Bench.
