STATE OF KERALAversusUNION OF INDIA

                   [2024] 4 S.C.R. 13 : 2024 INSC 253

                                 State of Kerala
                                        v.
                                 Union of India
                          (Original Suit No. 1 of 2024)
                                    01 April 2024
               [Surya Kant* and K.V. Viswanathan, JJ.]

                             Issue for Consideration
       What is the true import and interpretation of the expression “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” contained
       in Article 131 of the Constitution; Does Article 293 of the Constitution
       vest a State with an enforceable right to raise borrowing from the
       Union government and/or other sources and 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);
       What is the scope and extent of Judicial Review exercisable by this
       Court with respect to a fiscal policy purportedly in conflict with the
       object and spirit of Article 293; Is fiscal decentralization an aspect of
       Indian Federalism and if yes, do the impugned actions taken by the
       Defendant-Union of India purportedly to maintain the fiscal health of
       the country violate such Principles of Federalism; Are the impugned
       actions violative of Article 14 of the Constitution on the ground of
       ‘manifest arbitrariness’ or on the basis of differential treatment meted
       out to the Plaintiff-State vis-à-vis other States; What has been the
       past practice regarding regulation of the Plaintiff’s borrowing by the
       Defendant; If such practice has been restrictive of Plaintiff’s borrowings,
       can it estop the Plaintiff from bringing the present suit; Conversely, if
       such practice has not been restrictive, can it serve as the basis for
       the Plaintiff’s legitimate expectations against the Defendant; Are the
       restrictions imposed by the impugned actions in conflict with the role
       assigned to the Reserve Bank of India as the public debt manager
       of the Plaintiff; Is it mandatory to have prior consultation with States
       for giving effect to the recommendations of Finance Commission.

                                     Headnotes
       Constitution of India – Article 293 – Borrowing by States –
       Union of India inter alia imposed Net Borrowing Ceiling on the

* Author
14                                                                 [2024] 4 S.C.R.

                        Digital Supreme Court Reports


      State of Kerala, to restrict its maximum possible borrowing –
      Suit filed by State of Kerala on the premise that by undertaking
      the impugned actions, Union of India imposed ceiling on all
      its borrowings, and exceeded its power u/Article 293 – It also
      sought interim injunction, inter alia, to mandate Union of India
      to restore the position that existed before it imposed ceiling
      on all its borrowings; and to enable it to borrow INR 26,226
      crores on an immediate basis:
      Held: Since Article 293 has so far not been the subject of any
      authoritative interpretation by this Court, the questions arising in
      the present suit squarely fall within the ambit of Article 145(3) of
      the Constitution – Questions referred to Constitution Bench of five
      judges – Matter be placed before Hon’ble the Chief Justice of India
      for constitution of an appropriate Bench – Further, the Plaintiff-State
      also sought mandatory injunction and hence, was required to meet
      a higher standard for the triple-test of interim relief – Prima facie, the
      argument of the Union is accepted that where there is over-utilization
      of the borrowing limit in the previous year, to the extent of over-
      borrowing, deductions are permissible in the succeeding year, even
      beyond the award period of the 14th Finance Commission– Plaintiff
      failed to establish a prima facie case regarding its contention on
      under-utilization of borrowing – The mischief that is likely to ensue
      in the event of granting the interim relief, will be far greater than
      rejecting the same – Balance of convenience clearly lies in favour
      of the Union of India – Plaintiff sought to equate ‘financial hardship’
      with ‘irreparable injury’ – Prima facie ‘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 – 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 – Since
      the Plaintiff-State failed to establish the three prongs of proving
      prima facie case, balance of convenience and irreparable injury, it
      is not entitled to the interim injunction. [Paras 8, 10, 27, 28, 32, 33]
      Injunctions – Mandatory injunctions vis-à-vis prohibitory
      injunctions – Triple-Test – Prima facie case; Balance of
      convenience; Irreparable injury – Standard of scrutiny in
      applying these parameters for ‘prohibitory’ and ‘mandatory’
      injunctions:
[2024] 4 S.C.R.                                                               15

                      State of Kerala v. Union of India


     Held: Prohibitory injunctions vary from mandatory injunctions in
     terms of the nature of relief sought – While the former seeks to
     restrain the defendant from doing something, the latter compels
     the defendant to take a positive step – Prohibitory injunctions are
     forward-looking as they seek to restrict a future course of action –
     Conversely, mandatory injunctions are backward-looking because
     they require the defendant to take an active step and undo the past
     action– Courts are, therefore, relatively more cautious in granting
     mandatory injunction as compared to prohibitory injunction and
     thus, require the plaintiff to establish a stronger case – In the
     present case, the Plaintiff sought mandatory injunction and not a
     prohibitory one – Instead of arguing that the Defendant-Union of
     India should refrain from imposing a Net Borrowing Ceiling during
     the next F.Y., the Plaintiff applied for a backward-looking injunction,
     i.e., for an injunction to undo the imposition of the Net Borrowing
     Ceiling that covered various liabilities and to restore the position
     that existed before such ceiling – Hence, was required to meet a
     higher standard for the triple-test of interim relief. [Paras 13-15]
     Words and Phrases – “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” in Article 131 of the
     Constitution of India.

                                 List of Acts
     Constitution of India; Fiscal Responsibility and Budget Management
     Act, 2003; Kerala Fiscal Responsibility Act, 2003.

                              List of Keywords
     Borrowing by States; Ceiling on borrowings; Mandatory injunctions;
     Prohibitory injunctions; Triple-test of interim relief; Prima facie
     case; Balance of convenience; Irreparable injury; Fiscal policy;
     Federalism; Finance Commission.

                             Case Arising From
     ORIGINAL JURISDICTION : Original Suit No. 1 of 2024
     Original Suit has been instituted under Article 131 of the Constitution
     of India
     With
     I.A. No. 6149 of 2024
16                                                           [2024] 4 S.C.R.

                       Digital Supreme Court Reports


                         Appearances for Parties
      K. Gopalakrishna Kurup, A.G., Kapil Sibal, Sr. Adv., C. K. Sasi, V.
      Manu, Ms. Meena K Poulose, Ms. Anusha Nagarajan, Ms. Aparajita
      Jamwal, Ms. Manisha Singh, Rishabh Parikh, Ms. Sumedha Sarkar,
      Ms. Rupali Samuel, Advs. for the Plaintiff.
      R Venkatramani, Attorney General for India, N Venkatraman, A.S.G.,
      Raj Bahadur Yadav, Sonali Jain, Chitvan Singhal, Raman Yadav,
      Kartikay Aggarwal, Abhishek Kumar Pandey, Ms. Ameyvikrama
      Thanvi, Mukesh Kumar Singh, Advs. for the Defendant.
                 Judgment / Order of the Supreme Court
                                      Order
      Surya Kant, J.
1.    State of Kerala has instituted this Original Suit under Article 131 of
      the Constitution of India against the Union of India, challenging, inter
      alia, the following (collectively, the “Impugned Actions”):
      (a)   Amendment Act No. 13 of 2018 (dated 28.03.2018):
      By this Amendment Act, the Parliament has amended Section 4 of
      the Fiscal Responsibility and Budget Management Act, 2003, whereby
      the Central Government is obligated 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 (F.Y.) 2024-25;
      (b)   Letter No. 40(1)/PF-S/2023-24 (dated 27.03.2023):
      Through this letter, the Defendant has imposed a ‘Net Borrowing
      Ceiling’ on the Plaintiff - State, to restrict the maximum possible
      borrowing that Plaintiff could make under law. This ceiling was
      quantified as three percent of the projected Gross State Domestic
      Product (GSDP) for the F.Y. 2023-24, which came to INR 32,442
      crores. This Net Borrowing Ceiling covered all sources of
      borrowings, including open market borrowings, loans from Financial
      Institutions, and the liabilities arising out of the Public Account of
      the Plaintiff. Additionally, to prevent the States from by-passing
      the Net Borrowing Ceiling by using State-Owned Enterprises,
      the ceiling has also been applied to certain borrowings by such
      enterprises; and
[2024] 4 S.C.R.                                                             17

                      State of Kerala v. Union of India


     (c)   Letter No. 40(12)/PF-S/2023-24/OMB-52 (dated 11.08.2023):
     In this letter, the Defendant has accorded its consent to the Plaintiff
     to raise open market borrowing of INR 1,330 crores. It has also noted
     that the total open market borrowing allowed to the Plaintiff for the
     F.Y. 2023-24 was INR 21,852 crores.
2.   The instant suit has been filed on the premise that by undertaking the
     Impugned Actions, the Defendant - Union of India has exceeded its
     power under Article 293 of the Constitution of India, which provides:
           “293. Borrowing by States.—
           (1)   Subject to the provisions of this article, the executive
                 power of a State extends to borrowing within the
                 territory of India upon the security of the Consolidated
                 Fund of the State within such limits, if any, as may
                 from time to time be fixed by the Legislature of such
                 State by law and to the giving of guarantees within
                 such limits, if any, as may be so fixed.
           (2)   The Government of India may, subject to such
                 conditions as may be laid down by or under any
                 law made by Parliament, make loans to any State
                 or, so long as any limits fixed under article 292 are
                 not exceeded, give guarantees in respect of loans
                 raised by any State, and any sums required for the
                 purpose of making such loans shall be charged on
                 the Consolidated Fund of India.
           (3)   A State may not without the consent of the Government
                 of India raise any loan if there is still outstanding any
                 part of a loan which has been made to the State
                 by the Government of India or by its predecessor
                 Government, or in respect of which a guarantee
                 has been given by the Government of India or by
                 its predecessor Government.
           (4)   A consent under clause (3) may be granted subject
                 to such conditions, if any, as the Government of India
                 may think fit to impose.”
3.   Besides the afore-mentioned final relief in the suit, the Plaintiff -State
     also seeks interim injunction, inter alia, to mandate Union of India:
     (a) to restore the position that existed before the Defendant imposed
18                                                               [2024] 4 S.C.R.

                       Digital Supreme Court Reports


      ceiling on all the borrowings of the Plaintiff; and (b) to enable the
      Plaintiff to borrow INR 26,226 crores on an immediate basis.
4.    We have heard Mr. Kapil Sibal, Ld. Senior Advocate, for the Plaintiff
      - State, and Mr. R. Venkataramani, Ld. Attorney General for India
      and Mr. N. Venkataraman, Ld. Additional Solicitor General of India,
      on behalf of the Defendant – Union of India at a considerable length,
      and have perused the Plaint and other documents on record on the
      issue of maintainability of suit as well as the interim relief sought by
      the Plaintiff - State.
5.    In support of its prayer for the interim injunction, the Plaintiff - State has
      mainly urged that: (i) 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; (ii) the liabilities arising out of the Public Account
      and State-Owned Enterprises cannot be included in the borrowings
      of the Plaintiff; (iii) 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.; (iv) there has
      been under-utilization of permissible borrowing space from previous
      years, which the Plaintiff should be allowed to use now; (v) 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 (vi) 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.
6.    Per contra, the Defendant – Union of India controverted the Plaintiff’s
      interim claim and has argued that: (i) since management of public
      finance is a national issue, the Union of India has the power to
      regulate all the borrowings of the Plaintiff - State to maintain the fiscal
      health of the country; (ii) the liabilities arising out of Public Account
      and State-Owned enterprises can be included in the borrowings
      of the Plaintiff since they may be used to by-pass the borrowing
      ceiling; (iii) the pending dues have arisen on account of the fiscal
      mismanagement by the State of Kerala and are not a consequence
      of regulation of borrowing by the Union of India; (iv) the Plaintiff’s
      contention regarding under-utilized borrowing space from the previous
      years is based on erroneous facts; (v) the over-borrowing done in
      a F.Y. has to be adjusted against the borrowing amount of the next
[2024] 4 S.C.R.                                                               19

                      State of Kerala v. Union of India


     F.Ys.; and (vi) the fiscal health of the country will be jeopardized if
     the Plaintiff – State is allowed to undertake more debt.
7.   On a critical analysis of the contentions of both the sides, it seems
     to us that the instant suit raises more than one substantial questions
     regarding interpretation of the Constitution, including:
     (a)   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”?
     (b)   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?
     (c)   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?
     (d)   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?
8.   Since Article 293 of the Constitution has not been so far the subject
     to any authoritative interpretation by this Court, in our considered
     opinion, the aforesaid questions squarely fall within the ambit of
     Article 145(3) of the Constitution. We, therefore, deem it appropriate
     to refer these questions for pronouncement by a Bench comprising
     five judges.
9.   In addition, and as a necessary corollary to these questions, it appears
     that on merits also, various questions of significant importance
     impacting the Federal Structure of Governance as embedded in our
     Constitution, like, the following, arise for consideration:
     (a)   Is fiscal decentralization an aspect of Indian Federalism? If yes,
           do the Impugned Actions taken by the Defendant purportedly to
           maintain the fiscal health of the country violate such Principles
           of Federalism?
     (b)   Are the Impugned Actions violative of Article 14 of the
           Constitution on the ground of ‘manifest arbitrariness’ or on the
20                                                              [2024] 4 S.C.R.

                       Digital Supreme Court Reports


            basis of differential treatment meted out to the Plaintiff vis-à-vis
            other States?
      (c)   What has been the past practice regarding regulation of the
            Plaintiff’s borrowing by the Defendant? If such practice has
            been restrictive of Plaintiff’s borrowings, can it estop the Plaintiff
            from bringing the present suit? Conversely, if such practice has
            not been restrictive, can it serve as the basis for the Plaintiff’s
            legitimate expectations against the Defendant - Union of India?
      (d)   Are the restrictions imposed by the Impugned Actions in conflict
            with the role assigned to the Reserve Bank of India as the
            public debt manager of the Plaintiff?
      (e)   Is it mandatory to have prior consultation with States for giving
            effect to the recommendations of Finance Commission?
10. The Registry is accordingly directed to place this matter before Hon’ble
    the Chief Justice of India for the constitution of an appropriate Bench
    to answer the aforementioned questions and/or such other issues
    as may be identified by the Five-Judge Bench.
11. We may now advert to the issue as to whether, pending the decision
    on the questions formulated above, the Plaintiff – State can be
    granted the ad-interim injunction as briefly noticed in paragraph 3
    of this Order?
12. The globally acknowledged golden principles, collectively known as
    the Triple-Test, are followed by the Courts across the jurisdictions as
    the pre-requisites before a party can be mandatorily injuncted to do or
    to refrain from doing a particular thing. These three cardinal factors,
    that are deeply embedded in the Indian jurisprudence as well, are:
      (a)   A ‘Prima facie case’, which necessitates that as per the material
            placed on record, the plaintiff is likely to succeed in the final
            determination of the case;
      (b)   ‘Balance of convenience’, such that the prejudice likely to be
            caused to the plaintiff due to rejection of the interim relief will
            be higher than the inconvenience that the defendant may face
            if the relief is so granted; and
      (c)   ‘Irreparable injury’, which means that if the relief is not granted,
            the plaintiff will face an irreversible injury that cannot be
            compensated in monetary terms.
[2024] 4 S.C.R.                                                                  21

                           State of Kerala v. Union of India


13. At this juncture, it is necessary to distinguish the standard of scrutiny in
    applying these parameters for ‘prohibitory’ and ‘mandatory’ injunctions.
    Prohibitory injunctions vary from mandatory injunctions in terms of the
    nature of relief that is sought. While the former seeks to restrain the
    defendant from doing something, the latter compels the defendant to
    take a positive step.1 For instance, hypothetically, in the context of a
    construction dispute, if a plaintiff seeks to prevent the defendant from
    demolishing a structure, it would be deemed a prohibitory injunction.
    Whereas, if a plaintiff wants to compel the defendant to demolish a
    structure, then this would amount to mandatory injunction.
14. In that sense, prohibitory injunctions are forward-looking, such that
    they seek to restrict a future course of action. Conversely, mandatory
    injunctions are backward-looking, because they require the defendant
    to take an active step and undo the past action.2 Since mandatory
    injunctions require the defendant to take a positive action instead of
    merely being restrained from performing an act, they carry a graver
    risk of prejudice for the defendant if the final outcome subsequently
    turns out to be in its favour. For instance, in the example above,
    preventing the demolition of a structure for the time being cannot be
    perceived to be on the same pedestal as mandating the demolition
    of a construction. While the former may still be undone, i.e., the
    defendant may still be compelled to demolish the structure should the
    plaintiff succeeds in his final claim, undoing the latter, i.e., rebuilding
    the construction, would cause graver injustice. The Courts are,
    therefore, relatively more cautious in granting mandatory injunction
    as compared to prohibitory injunction and thus, require the plaintiff
    to establish a stronger case.3
15. Reverting to the facts of the case in hand, the Plaintiff – State has
    sought mandatory injunction and not a prohibitory one. Instead of
    arguing that the Defendant – Union of India should refrain from imposing
    a Net Borrowing Ceiling during the next F.Y., the Plaintiff has applied
    for a backward-looking injunction, i.e., for an injunction to undo the
    imposition of the Net Borrowing Ceiling that covered various liabilities
    and to restore the position that existed before such ceiling. Hence,



1   State of Haryana v. State of Punjab, (2004) 12 SCC 673, para 37-38.
2   Shepherd Homes Ltd. v. Sandham, [1970] 3 WLR 348.
3   Id., Dorab Cawasji Warden v. Coomi Sorab Warden, (1990) 2 SCC 117, para 16.
22                                                            [2024] 4 S.C.R.

                      Digital Supreme Court Reports


      the Plaintiff is required to meet a higher standard for the triple-test of
      interim relief as mentioned in paragraph 12 above of this order.
16. Coming to the first factor, i.e., the prima facie case, the Plaintiff
    – State has raised various substantive questions of constitutional
    interpretation. Generally speaking, the phrase ‘prima facie case’ is
    not a term of art and it simply signifies that at first sight the plaintiff
    has a strong case. According to Webster’s International Dictionary,
    ‘prima facie case’ means a case established by ‘prima facie evidence’,
    which in turn means the evidence that is sufficient in law to raise a
    presumption of fact unless rebutted.
17. The Plaintiff – State has argued that based on the States Finance
    Accounts audited by the Comptroller and Auditor General of India
    and the achievements of the fiscal deficit targets, the Plaintiff – State
    has under-utilized permissible borrowing space in the last three F.Ys.
    (2020-21, 2021-22 and 2022-23) to the extent of INR 24,434 crores.
    The Plaintiff – State contends that even going by the stand of the
    Union, the under-utilized space of the Plaintiff for the said period
    borrowings is INR 10,722 crores, which it should be allowed to borrow.
18. Mr. Kapil Sibal, learned Senior Counsel for the Plaintiff – State,
    submitted that under the recommendations of the 15th Finance
    Commission, the State is entitled to borrow up to the maximum
    permissible fiscal deficit for the year. He relied on paragraphs 12.64
    and 12.65 of the Report of the 15th Finance Commission, which read
    as under:
           “12.64 If a State is not able to fully utilise its sanctioned
           borrowing limit, as specified above, in any particular
           year during the first four years of our award period
           (2021-22 to 2024 -25), it will have the option of availing
           this unutilised borrowing amount (calculated in rupees)
           in any of the subsequent years within our award period.
           12.65 Based on these assumptions, we have worked
           out the debt path for States, as presented in Table 12.4.
           Since all estimated revenue deficits are met by equivalent
           provision of revenue deficit grant, the revenue surpluses
           run by the States are reflected by the negative numbers
           on revenue deficit presented in the table. The State debt
           in aggregate tapers off gradually after 2022-23. This is
[2024] 4 S.C.R.                                                             23

                          State of Kerala v. Union of India


           similar to the pattern in the debt path of the Union shown
           in Table 12.2. The State-specific indicative debt paths are
           given in Annex 12.1.
           Table 12.4: Indicative Deficit and Debt Path for State
           Governments
                                                              (% of GSDP)

                          2020-21 2021-22 2022-23 2023-24 2024-25 2025-26
            Revenue        -0.1     -0.5    -0.8    -1.2      -1.7   -2.5
            deficit*
            Fiscal          4.5     4.0     3.5     3.0       3.0    3.0
            deficit
            Total          33.1    32.6    33.3    33.1       32.8   32.5
            liabilities

           *negative values indicate surplus and positive values
           indicate deficit
           Note: While arriving at the total liabilities of States for the
           year 2021-22, an aggregate fiscal deficit of 3.5 per cent
           of GSDP is taken because some States may not avail of
           the full unconditional net borrowing space of 4 per cent.”
19. According to the learned Senior Counsel, since the fiscal deficit for
    2023-24 is 3% of GSDP, they should be allowed the full borrowing
    without any restrictions.
20. Mr. N. Venkataraman, learned ASG, controverted the submission of
    the Plaintiff – State. According to learned ASG, while the figures as
    projected by the State are themselves in dispute, the State is not
    entitled to borrow the amounts as claimed since the over-borrowing
    by the State of Kerala from F.Ys. 2016-17 to 2019-20 is INR 14,479
    crores. According to him, if these over-borrowings are factored in the
    borrowing space, it will be found that the State has not under-utilized
    but over-utilized its borrowing capacity by INR 2,941.82 crores till
    F.Y. 2022-23. The learned ASG, relying on paragraph 14.64 of the
    Report of the 14th Finance Commission, contended that if the State
    is not able to fully utilize its sanctioned borrowings limit of 3% of
    GSDP in any particular year during the first four years of the award
    period (2015-16 to 2018-19), the State will have the option of availing
24                                                          [2024] 4 S.C.R.

                     Digital Supreme Court Reports


      this un-utilized borrowing amount (calculated in Rupees) only in the
      following year within the award period. However, there is a difference
      between under-utilization of the borrowing limit and over-utilization
      of the borrowing limit. Learned ASG maintained that over-utilization
      is dealt with in Annexure 14.2 of Chapter-XIV in the Report of the
      14th Finance Commission, which clearly prescribes as under:
           “Case II. Over-utilizing the borrowing amount:
           If a State, in a given year, borrows over and above the
           sanctioned borrowing limit by x amount, then in the
           succeeding year, the same x amount of the previous
           year will be deducted from the States borrowing limit of
           that year.”
21. According to learned ASG, the Plaintiff – State is wrong in contending
    that such deduction in the succeeding year can only be made within
    the award period of the 14th Finance Commission. He explained that
    over-borrowings of the previous year were adjusted for the F.Ys.
    2021-22, 2022-23 and 2023-24 (as on date) to the tune of INR
    9,197.15 crores, INR 13,067.78 crores and INR 4,354.72 crores
    respectively. According to learned ASG, the State was fully conscious
    of the correct position in law and had rightly acquiesced in the
    adjustments of the over-borrowings. Having acquiesced, it does not
    lie in the mouth of the Plaintiff – State to contend that once the period
    for the 15th Finance Commission has set in from F.Ys. 2021-22 to
    2025-26, the over-borrowings of the previous years have absolutely
    no relevance. Learned ASG vehemently argued that the Plaintiff is
    wrong in contending that a reading of the report of the 14th and 15th
    Finance Commission indicates that for both under-utilization and
    over-utilization, all adjustments have to be made within the period
    covered by the Report of the Commission.
22. Prima facie, we are inclined to accept the argument of the Union that
    where there is over-utilization of the borrowing limit in the previous
    year, to the extent of over-borrowing, deductions are permissible
    in the succeeding year, even beyond the award period of the 14th
    Finance Commission. This is, however, a matter which will have to
    be finally decided in the suit.
23. At this stage, based on the contentions of the Plaintiff – State with
    which we are not prima facie convinced, permitting any borrowing—
[2024] 4 S.C.R.                                                        25

                    State of Kerala v. Union of India


     whether INR 24,434 crores as claimed in the written note or INR
     10,722 crores as alternatively claimed—would not be tenable.
24. In fact, it has been admitted by the Plaintiff – State that there has
    been over-borrowing/over-utilization of the borrowing limit between
    the F.Ys. 2017-18 and 2019-20. It is not denied that if, as contended
    by the Union, such over-borrowings are adjustable in the succeeding
    years, then the State has already exhausted its borrowing limits for
    the F.Y. 2023-24.
25. We find, prima facie, 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 Plaintiff – 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.
26. Our attention has also been invited to the Kerala Fiscal Responsibility
    Act, 2003. The Act is enacted to provide for the responsibility of the
    government to ensure prudence in fiscal management and fiscal
    stability by progressive elimination of revenue deficit and sustainable
    debt management consistent with fiscal stability, greater transparency
    in fiscal operations of the government and conduct of fiscal policy
    in a medium term fiscal framework and for matters connected there
    with and incidental thereto. The Preamble of the Act also states
    that it was felt expedient to provide for the responsibility of the
    government to ensure prudence in fiscal management and fiscal
    stability by progressive elimination of revenue deficit and sustainable
    debt management consistent with fiscal stability.
27. In view of above, we find prima facie merit in the submission of the
    Union of India that after 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. Hence, we are unable to accept the argument of the
    Plaintiff at the interim stage that there is fiscal space of unutilized
    borrowing of either INR 10,722 crores as was orally prayed during
    the hearing or INR 24,434 Crores which was the borrowing claimed
    in the negotiations with the Union.
28. Therefore, the Plaintiff – State has failed to establish a prima facie
    case regarding its contention on under-utilization of borrowing.
    Further, with respect to its other contentions, while the Plaintiff
26                                                          [2024] 4 S.C.R.

                     Digital Supreme Court Reports


      has sought to construe Article 293 restrictively to limit the Central
      government’s power only to the loans granted by it, the Defendant
      has contended that if Article 293 is read in such a manner, it would
      render this provision redundant as the Central Government has an
      inherent power as a lender to impose conditions on such loans even
      in the absence of any express constitutional provision. Similarly, the
      Defendant has contested the Plaintiff’s narrow reading of the term
      ‘borrowing’ and has argued that off-budget borrowings could also
      be included in the same if they are used to by-pass the conditions
      imposed under Article 293 of the Constitution.
29. Since this Article has not been the subject of an authoritative
    pronouncement of this Court so far, we cannot readily accept the
    Plaintiff’s contention over the Defendant’s interpretation by taking it
    on face value. In this regard, we have referred the matter to a larger
    bench of five judges, as mentioned in paragraph 10 of this order.
30. Hence, on consideration of the limited material available on record
    so far, the Plaintiff – State has not established a prima facie case
    to the extent required in the instant suit.
31. With respect to the second prong for claiming the interim relief,
    the Plaintiff – State has argued that if the interim injunction is not
    granted, it is likely to face extreme financial hardship on account of
    its pending dues. As against this, the Defendant – Union of India
    has highlighted the grave consequences regarding the fiscal health
    of the country if the Plaintiff is allowed the interim relief. The Union
    of India has argued that additional borrowing by the State will have
    spill-over effects and may raise the prices of borrowing in the market,
    possibly crowding out the borrowing by private investors. This may
    then have an adverse impact on the production of goods and services
    in the market, possibly affecting the economic well-being of every
    citizen. Since the Central government borrows money from outside
    the country and lends money to the State governments, borrowings of
    the States are intricately linked to the creditworthiness of the country
    in the international market. Hence, the Union of India argued that
    in case such borrowings by State Governments are not regulated,
    it may negatively impact the macro-economic growth and stability
    of the entire nation.
32. On a comparative evaluation of the submissions, it seems to us that
    the mischief that is likely to ensue in the event of granting the interim
[2024] 4 S.C.R.                                                           27

                     State of Kerala v. Union of India


     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 Plaintiff - State succeeds subsequently in the final
     outcome of the suit, it can still pay the pending dues, may be with
     some added burden, which can be suitably passed on the judgment
     - debtor. The balance of convenience, thus, clearly lies in favour of
     the Defendant – Union of India.
33. Finally, as regards to the third pre-condition, we find that the Plaintiff
    – 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.
34. We may hasten to remind ourselves at this stage that according to
    the Defendant-Union of India, the Plaintiff – State is apparently a
    highly debt stressed State that has mismanaged its finances. This
    statement, however, is strongly refuted by the State. According to the
    Union, the Plaintiff has the highest ratio of Pension to Total Revenue
    Expenditure among all States and requires urgent measures to
    reduce its expenditure. Instead of doing so, the Plaintiff is borrowing
    more funds to meet its day-to-day expenses such as salaries and
    pensions. Accordingly, the Defendant has contended that the financial
    hardship is not attributable to the regulation of Plaintiff’s borrowing
    and is actually a consequence of its own actions. Furthermore,
    the Defendant maintains that restriction on the borrowing is a step
    towards the betterment of fiscal health of the State because if such
    borrowings are not restricted, the Plaintiff’s position will become
    more precarious, leading to a vicious cycle of deteriorating financial
    health and increased borrowing to repair the same.
35. 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. There is an arguable point that if we were to issue interim
    mandatory injunction in such like cases, it might set a bad precedent
    in law that would enable the States to flout fiscal policies and still
    successfully claim additional borrowings.
28                                                           [2024] 4 S.C.R.

                      Digital Supreme Court Reports


36. In any case, we cannot be oblivious of the fact that in light of
    the Plaintiff’s contention regarding pending financial dues, the
    Defendant has already made an offer to allow additional borrowing.
    In a meeting dated 15.02.2024, the Defendant first offered consent
    for INR 13,608 crores, out of which INR 11,731 crore was subject
    to the pre-requisite of withdrawal of the suit, a condition that we
    disapproved of. Subsequently, in a meeting dated 08.03.2024, the
    Union offered a consent for INR 5,000 crores. Further, vide circulars
    dated 08.03.2024 and 19.03.2024, the Union has accorded consent
    for INR 8,742 crores and INR 4,866 crores respectively, which comes
    to a sum total of INR 13,608 crores. Even if we assume that the
    financial hardship of the Plaintiff is partly a result of the Defendant’s
    Regulations, during the course of hearing this interim application,
    the concern has been assuaged by the Defendant – Union of India
    to some extent so as to bail out the Plaintiff – State from the current
    crisis. The Plaintiff thus has secured substantial relief during the
    pendency of this interim application.
37. To sum up, we are of the view that since the Plaintiff – 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.
38. In light of the above observations, I.A. No. 6149 of 2024 is disposed off.
39. It is clarified that the observations made hereinabove are for the
    limited purpose of deciding the prayer for ad-interim injunction and
    shall have no bearing on the final outcome of the Original Suit.
40. The main case be placed before Hon’ble the Chief Justice of India
    for constitution of an appropriate Bench.


      Headnotes prepared by: Divya Pandey                   Result of the case:
                                               Matter referred to Larger Bench.