In a recent hearing on February 19, the Supreme Court was informed that talks between the Centre and the State of Kerala regarding the deadlock over borrowing limits have failed to produce any resolution. The bench, consisting of Justices Surya Kant and KV Viswanathan, was addressing the Kerala government's plea for interim relief in its legal battle against the Union of India over perceived encroachments on its financial autonomy.

The court had previously advised Kerala to engage in dialogue with the Union to break the deadlock, but last week's talks reportedly yielded no results. Senior advocate Kapil Sibal, representing Kerala, expressed frustration, attributing the failure to the Centre's reluctance to release the requested Rs 11,731 crores, which the state believed it was entitled to based on their own policy.

According to Sibal, the Centre conditioned the release of funds on Kerala withdrawing its lawsuit, a proposition vehemently opposed by the state. The central government's stance was explained by Additional Solicitor General N Venkataraman, who clarified that the Centre had already consented to a total borrowing of Rs 34,230 crores, exceeding the statutory ceiling by Rs 1,788 crores. Venkataraman stated that the Centre offered an additional borrowing facility of Rs 1,877.57 crores and an additional space of Rs 11,731 crores, subject to the withdrawal of the lawsuit.

As the verbal exchange between the lawyers intensified, Justice Kant intervened, emphasizing the need for continued negotiation between the parties. He acknowledged the complexities involved, stating, "What appears to us is that there is still some misunderstanding. The Centre is also open to providing assistance and rescuing you from this crisis, and you also have some apprehensions. If you can continue the spirit of negotiation, then it's fine."

The court acknowledged the need to examine the cross-country impact and consequences of any interim order before issuing it. Sibal argued that Kerala's over-borrowing was driven by essential expenditures in education and health, and the state should not be penalized for investing in human development. However, Venkataraman countered, pointing out that Kerala had exceeded its expenditure by 22 percent, not on capital, and the Centre's offer was reasonable in the spirit of federalism.

The court directed the matter to be listed for further hearing on March 6, recognizing the urgency of the case highlighted by Sibal, who warned of potential default if the issue persisted until the end of the year. The court expressed its limitations in passing an interim order, emphasizing the need to examine all aspects of the case thoroughly.

The legal dispute originated in December when Kerala petitioned the apex court, alleging undue interference from the central government in its fiscal affairs. The state argued that Ministry of Finance directives were inhibiting its ability to meet budgetary commitments and imperiling vital welfare schemes. The Union defended its actions, emphasizing the need for centralized oversight to safeguard macroeconomic stability.

Case: State of Kerala vs. Union of India.