MARCH 29, 2024

By TIOL Edit Team

THE ongoing hearing of Kerala's petition in the Supreme Court against the Centre's borrowing curb on the State(s) is both unfortunate as well as welcome. Unfortunate because the litigation was totally avoidable had the Centre cared to resolve such growth-decelerating issues at Inter-State Council (ISC).

Welcome, because the litigation turns the torchlight on fiscal rot created by successive regimes at the Centre and the States over the decade. Fiscal rot is only one aspect of the deteriorating centre-state relations. This has forced the Opposition-ruled States to knock at the doors of the Supreme Court time and again on different issues.

This is the third instance of Kerala filing petition against the Centre in the Supreme Court. The latest case suit is against both the Governor and President for delaying assent to certain bills passed by Kerala Assembly. The draft legislation falls exclusively in the State's list of subjects under the Constitution. The roadmap for avoiding delays was laid by at least two commissions on Centre-State ties during the last 40 years. ISC could have decided on all recommendations of the Commissions at a few sittings. It won't do as the ruling party at the Centre won't like Opposition-ruled States to perform well. Double-Engine (same ruling party at the Centre and the State) has redefined Centre-State relationship.

Relevant here is an ongoing probe by the Enforcement Directorate (ED) since 2020 against overseas 'masala bonds' issued by Kerala Infrastructure Investment Fund Board (KIIFB), a statutory body chaired by the State Chief Minister. KIIFB had mopped up Rs.2,150 crores in March 2019 from foreign investors through this Rupee-denominated debt offering.

The State's former Finance Minister Dr. TM Thomas Isaac & a few KIIFB officials have already pleaded against issue of summons by ED at Kerala High Court. His contention is that ED is asking personal information about him and his family for 10 years instead of specifying allegations against him.

It is for the first time ED is probing masala bonds issued by a government entity for alleged breach of Foreign Exchange Management Act (FEMA). ED suspects that the proceeds of this debt issue have been invested in real estate& other areas prohibited under External Commercial Borrowings guidelines.

Was this question ever tossed before National Highway Authority of India (NHAI), which is neck-deep in debt raised at home and abroad? What about Indian Railways Finance Corporation (IRFC), which too has piled debt mountain via successive bond issues launched within & outside the country?

The High Court has already expressed displeasure on account of ED avoiding replying to its questions. KIIFB had unveiled the issue after securing no-objection certificate from Reserve Bank of India (RBI). Such probes can vitiate investment climate in Opposition-ruled States.

Any layman would wonder whether surface-based infrastructure projects such as road, rail track, airport or pipeline be undertaken without acquiring land?

ED's 2 nd contention is that the probe has been necessitated by CAG report. Kerala High Court, in its order dated 10th October 2022, has quoted ED's counsel as stating "Masala Bonds is a classic case of off budget borrowings (OBBs), which bypasses the limits set on Government borrowings under Article 293 of the Constitution of India and violates the provision of Entry 37(foreign loans) of List 1. The procedure under the FEMA require the Enforcement Directorate to file a complaint based on the inquiry."

CAG identifies OBBs by another term, extra-budgetary resources (EBRs) in its reports on the Centre's compliance with Fiscal Responsibility and Budget Management (FRBM) Act.

We hope this duality in CAG's approach would be debated during the hearing. It should ultimately pave the way for one definition of OBB, one definition of debt, one definition of contingent liabilities and one compliance framework for all governments.

After High Court's order mentioned earlier, ED withdrew its summons to Dr. Isaac and later issued fresh summons to him in February 2022. This prompted him to again approach the Court against the summons. The case was last heard on 26th March 2024. The next hearing is in May.

If CAG report is made springboard for probes by central agencies against Opposition-ruled States, then the public would expect the Centre to explain why dozens of CAG reports on fiscal misconduct, revenue leakages and OBBs have not triggered a single ED or CBI probe against the Centre& its appendages?

An instance in point is the CAG report on Railways Finances for 2022-23 released on 8th August 2023. Referring to IRFC's borrowings at home & abroad, CAG cautions: " The market borrowings have financial liabilities attached in the form of payment of huge interest and return of principal amount in stipulated time period. MoR (Ministry of Railways) needs to be more cautious not to get into a dept-trap and ensure optimal and judicious utilization of EBR funds ."

Another example in point is CAG report on Centre's Compliance with FRBM for 2020-21 issued on 20th December 2022. This is the latest available annual report on fiscal conduct of the Union Government.

It defines "Debt sustainability" as the ability of the Government to "maintain a constant Debt to GDP ratio over a period and the ability to service its debt."

The Report notes: "The Central Government debt can be seen as increasing over the last five years and during 2020-21 this increase was 16.06 per cent over 2019-20. While the Debt-GDP ratio was around 49 per cent during 2016-17 to 2018-19, an increasing trend was seen during 2019-20 and 2020-21. The debt growth rate outgrew the GDP growth rate, resulting in an increased Debt-GDP ratio of 52.33 per cent, and 61.57 per cent during 2019-20 and 2020-21 respectively."

Such painful facts ought to be discussed without political bickering to formulate one debt sustainability norm for both the Centre and the States.

We thus urge the Supreme Court to hear Kerala's contentions and seek other States' views on all such& similar issues while allowing the Centre to respond to States' grievances. This is very crucial for reviving team India spirit for Poverty-Free India, Corruption-Free India, etc for which Prime Minister Narendra Modi had set 2022 as the deadline while unveiling Pledge for New India by 2022.

We believe the Apex Court's guidance is the only way forward through politically vitiated fog. The Court's umbrella verdict on Cooperative Federalism would restrain governments from clogging the judicial system with the Centre-States disputes and inter-State disputes.

Are the Centre, States and Judiciary complacent with the fact that Inter-State Council, the forum for resolving such disputes, has met only once under Mr. Modi's chairmanship since mid-2014?

We urge all governments, the President and the Supreme Court to create conflicts-free ecosystem for realizing the vision Viksit Bharat 2047.

Turn now to Kerala's fiscal petition against the Centre on whittling down its borrowing limits, thereby hurting Left regime's welfare-cum-capital investment initiatives.

The trigger for petition is the cherry-picking of recommendations of 15th Finance Commission (15thFC) by Union Finance Ministry to clip wings of the Opposition-ruled States.

The Centre is right when it tells the apex court that it has done phased reduction in annual borrowings by States as recommended by 15thFC. What is notable is that this is a non-binding recommendation and not a binding one relating to statutory transfer of resources from the Centre to the States.

Due to non-availability of petition, affidavits and counter-affidavits and transcript of the hearing, we would caveat our observations with the words perhaps and probably.

In all probability, the issue of the Centre either rejecting or remaining indifferent towards non-binding recommendations of successive finance commissions has not yet cropped during the hearing. A case in point is, both UPA & NDA regime trashing the idea of setting up independent fiscal council recommended by 13th , 14th and 15th FCs. Both regimes have changed fiscal rules and goalposts to suit their whims and fancies.

As put by International Monetary Fund in its annual country report on India released on 18th December 2023, "The use of off-budget spending by the center and states also renders adherence to the headline deficit target less meaningful. That said, the introduction of the FRBM Act did coincide with a period of sustained improvement in the fiscal deficit."

In the long-term national interest & non-existing inter-generational equity policy, we urge the Supreme Court to first club this case with PIL on freebies. This is because all regimes raise debt to finance freebies guaranteed by politicians in the party manifesto and political rallies.

Both the BJP and Opposition parties are locked in cut-throat battle to turn fiscal space into a platform for launching freebies. There is no national party that is seeking votes in the name of responsible governance of which inter-generational equity has to be the core.

We request the Supreme Court to appoint a committee of independent experts after clubbing Kerala's petition & freebies PIL.This panel should be asked to summarize recommendations of successive Finance Commissions not implemented by the Centre.

Whichever the ruling party at the Centre, it always adopts a big brother stance in its interaction with the States. The Committee should also be empowered to prepare compendium on each & every instance of fiscal opacity and indifference by both the Centre and the States, overlooking repeated observations, conclusions and recommendations by CAG in its reports.

Simultaneously, we implore PM to give 'Modi Guarantee' to public in his capacity as ISC chairman that it would meet at least three times in a year as mandated by Presidential Order dated 25th May 1990 on ISC.

PM's interaction with Chief Ministers at these meetings can certainly pave the way for resolving centre-State conflicts and inter-state disputes. One of the basic principles of Ram Rajya should be harmony among its constituents.