The Supreme Court on Monday explained the Triple Test for injunction orders. The bench of Justices Surya Kant and K.V. Viswanathan was dealing with the case where the State of Kerala had filed a Suit under Article 131 of the Constitution of India against the Union of India. The suit challenged several actions referred to as the “Impugned Actions”:
- The Amendment Act No. 13 of 2018, dated 28.03.2018 amended Section 4 of the Fiscal Responsibility and Budget Management Act, 2003. The amendment obligates the Central Government 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 2024-25.
- (b) Through Letter No. 40(1)/PF-S/2023-24, dated 27.03.2023 the Union of India imposed a ‘Net Borrowing Ceiling’ on the State of Kerala, restricting the maximum possible borrowing the state could make under the law. The ceiling was set at three percent of the projected Gross State Domestic Product (GSDP) for the Financial Year 2023-24, amounting to INR 32,442 crores. This ceiling covered all sources of borrowings, including open market borrowings, loans from financial institutions, and liabilities arising out of the Public Account of the state.
- Through Letter No. 40(12)/PF-S/2023-24/OMB-52, dated 11.08.2023 the Union of India accorded consent to the State of Kerala to raise open market borrowing of INR 1,330 crores. It also noted that the total open market borrowing allowed to the state for the Financial Year 2023-24 was INR 21,852 crores.
The suit argues that by undertaking these actions, the Union of India has exceeded its power under Article 293 of the Constitution of India.
Kapil Sibal, counsel for the plaintiff submitted that 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. The liabilities arising out of the Public Account and State-Owned Enterprises cannot be included in the borrowings of the Plaintiff. 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.
It was further submitted that there has been under-utilization of permissible borrowing space from previous years, which the Plaintiff should be allowed to use now. The over-borrowing 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 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.
R. Venkataramani and N. Venkataraman, counsel for the defendant submitted that since management of public finance is a national issue, the Union of India has the power to regulate all the borrowings of the State to maintain the fiscal health of the country. The liabilities arising out of Public Accounts and State-Owned enterprises can be included in the borrowings of the Plaintiff since they may be used to by-pass the borrowing ceiling.
It was further argued that the pending dues have arisen on account of the fiscal mismanagement by the State of Kerala and are not a consequence of the regulation of borrowing by the Union of India. The Plaintiff’s contention regarding under-utilized borrowing space from the previous years is based on erroneous facts. The over-borrowing done in a F.Y. has to be adjusted against the borrowing amount of the next F.Ys.; and the fiscal health of the country will be jeopardized if the State is allowed to undertake more debt.
The questions before the bench were:
- 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”?
- 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?
- 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?
- 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?
The bench found 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 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.
Supreme Court found merit in the submission of the Union of India that after the 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.
The bench opined that ………..the mischief that is likely to ensue in the event of granting the interim 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 State succeeds subsequently in the final outcome of the suit, it can still pay the pending dues, maybe with some added burden, which can be suitably passed on the judgment – debtor. The balance of convenience, thus, clearly lies in favour of the Union of India.
Supreme Court observed that the 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.
The bench found that the Union of India asserts that the State is heavily burdened with debt and has mishandled its financial affairs. However, the State vehemently denies these claims. According to the Union, the State has the highest ratio of Pension to Total Revenue Expenditure among all States, indicating a significant strain on its finances. Urgent measures to reduce expenditure are deemed necessary by the Union. Nevertheless, the State is reportedly increasing borrowing to cover routine expenses like salaries and pensions, rather than implementing austerity measures as advised by the Union.
Supreme Court opined 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 Union.
The bench noted that Plaintiff’s contention regarding pending financial dues has prompted Defendant to make several offers for additional borrowing. Initially, on February 15, 2024, the Defendant offered consent for INR 13,608 crores, with a condition of withdrawing the suit, which was not accepted by the Plaintiff. Despite potential financial hardships resulting from Defendant’s regulations, Defendant, i.e., the Union of India, has taken steps to alleviate some of Plaintiff’s concerns during the interim application process. This has resulted in significant relief for the Plaintiff during the pendency of the application.
Supreme Court opined that since the 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.
In view of the above, the bench directed to place the case before the Chief Justice of India for the constitution of an appropriate Bench.
Case Title: State of Kerala v. Union of India
Bench: Justices Surya Kant and K.V. Viswanathan
Case No.: Original Suit No. 1 of 2024
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