The Kerala state government has taken its grievances against what it perceives as undue interference by the Central government in its financial matters to the Supreme Court. Alleging that the imposition of borrowing limits by the Union government has led to the accumulation of unpaid debts, the state claims an impending severe financial crisis. In a suit filed under Article 131 of the Constitution, Kerala argues that executive actions by the Central government are infringing upon the state's authority to manage its finances independently.

As of October 31, 2023, Kerala asserts an urgent need for ₹26,226 crores to avert the looming financial crisis resulting from what it deems as restrictive orders. The state argues that the Union government's imposition of a Net Borrowing Ceiling impedes its ability to borrow from various sources, including the open market, encroaching upon the state's constitutional jurisdiction over financial matters.

The legal document contends that reinstating the Net Borrowing Ceiling, established by the Kerala Fiscal Responsibility Act of 2003, is crucial for maintaining the state's budgeting process. Kerala emphasizes the potential catastrophic consequences if the state's treasury operations face restrictions or come to a halt.

The state government challenges directives issued by the Ministry of Finance in letters from March and August of the current year, along with amendments to Section 4 of the Fiscal Responsibility and Budget Management Act of 2003 through the Finance Act of 2018. It argues that these directives impose unconstitutional restrictions on the state's ability to borrow and manage its finances independently.

Kerala maintains that the authority to determine the state's borrowing, crucial for balancing the budget and addressing fiscal deficits, falls exclusively within the jurisdiction of the states. The suit questions the constitutional right of the Union government to issue directives to the state government under Article 293 of the Constitution, asserting that such directives undermine the federal structure by encroaching upon the exclusive financial domains of the state.

The state government has informed the Supreme Court of a cumulative expenditure loss or resource deficiency of ₹1,07,513.09 crores spanning Fiscal Year 2016-2023 due to actions taken by the Central government. This financial shortfall has prevented the state from fulfilling commitments outlined in its annual budgets, leading to substantial arrears owed in welfare schemes, especially to the poor and vulnerable, beneficiary groups, state government employees, pensioners, and outstanding dues to state-owned enterprises.

Kerala's legal action marks a trend where states are increasingly resorting to the judiciary to resolve disputes and seek remedies in financial matters and governance. This follows a similar move by the Punjab government, which initiated legal action against the Central government, focusing on the alleged non-reimbursement of statutory fees amounting to over ₹4,000 crores during the procurement of food grains. These legal actions highlight a growing inclination among states to seek judicial intervention in addressing financial and governance issues.