Kerala’s CPI(M) Government Wants Rs 26,000 Crore But Won’t Follow Fiscal Discipline

Kerala’s Communist Party of India (Marxist) (CPI(M)) government is in the Supreme Court demanding what it deems as entitlement on the state's finances.

In its petition filed in December 2023, Pinarayi Vijayan government stated that it required Rs 26,000 crore to avoid an impending financial crisis. 

According to the state government, the Centre’s amendment to Fiscal Responsibility and Budget Management Act (FRBM), 2003, has curtailed its borrowing limit by Rs 17,032 crore. The act was last amended in 2022, with an eye on reducing the fiscal deficit to 4.5 per cent of gross domestic product (GDP) by financial year (FY) 2026.

Initially, the court asked both Centre and state to enter into negotiation, which failed. On 12 March 2024, a bench of justices Surya Kant and K V Viswanathan asked the Centre to allow a one-time borrowing.

On 13 March 2024, the Centre agreed in principle, but instead of Vijayan government’s demand of Rs 19,351 crore (Rs 26,000 crore initially), it allowed for borrowing upto only Rs 5,000 crore.

"...in view of the court's suggestion, we can allow 5,000 crores that will be deducted from net borrowing ceiling for first nine months... Subject to certain conditions," submitted N Venkataraman, Additional Solicitor General.

CPI(M) government vehemently rejected it.

The Vijayan government’s rationale for rejecting this concession is two-fold.

Firstly, it contends that the amount is too small. Senior advocate Kapil Sibal, representing the state government, submitted that they need at least Rs 10,000 crore.

He further argued that the state government is only demanding what it is entitled to under the recommendations of the Finance Commission. "I can demonstrate that we are entitled to borrow this amount under the law," argued Sibal.

Secondly, the Centre has imposed certain conditions before it grants borrowing. They are:

One, Rs 5,000 crore will be deducted from the net borrowing ceiling of Kerala for the first nine months of FY 2025.

Two, Vijayan government shall not engage in any ad hoc borrowing for FY 2025.

Three, the Centre will give consent for borrowing in FY 2025 only when state government furnishes certain information and documents. 

Four, for every quarter upto the third quarter in FY 2025, separate consents for borrowing will be issued. Each will be capped at 25 per cent of the eligible amount after the initial deduction of Rs 5,000 crore.

Five, fifth condition of granting concession is that the CPI(M) government has to detail out an alternative plan for mobilising finances and also improve the financial condition of communist-ruled state. The state government had announced its consent to plan B in its FY 2025 budget, but hadn’t put the blueprint. The Centre has asked it to do so by the fourth quarter of this financial year.

A thorough reading of these conditions suggest that all five, if followed properly, can bring a sense of fiscal prudence in state government’s machinery.

For instance, the deduction of Rs 5,000 crore from the next borrowing cycle will lead to the state government focusing more towards priority spending.

Currently, spending on staff members, lots of them are just politically appointed ones, is a major non-priority burden on state government. 

By asking the Vijayan government to refrain from ad hoc borrowing, the Centre has made its stand more clear. It will curtail unplanned expenditure.

Through its third and fourth conditions, the Union government wants better oversight of the state's finances. Each document submitted by the Vijayan government on its spending will definitely be subject to review. Payments in separate tranches seem to be designed to create a threat perception and induce SWOT analysis within state machinery.

Lastly, keeping plan B ready in case of exigency can make the state better prepared for situations like floods, pandemics. It can also result in improved tax collection or identification of new sources of income.

However, the Vijayan government is not looking towards the brighter side of the picture. Contrarily, Sibal informed the Supreme Court that such conditions contradict the principles of federalism — a trope frequently used by opposition-led states to criticise the Centre's actions as unjust.

He said that these conditions are a veil through which the Centre is trying to cover its attempts of controlling the finances of the state. Sibal further contended that Kerala would face "irreparable injury" if such concession is not allowed.

The apex court has suggested the Vijayan government accept Rs 5,000 crore in the meantime and persuade the Union government for more. Next hearing in the case is scheduled for 21 March 2024.