Kerala one of most financially unhealthy states, Attorney General tells Supreme Court

Kerala’s financial condition and debt situation have drawn criticism from various quarters, including successive Finance Commissions (12th, 14th, and 15th) and the Comptroller and Auditor General of India (CAG). Attorney General R Venkataramani, in a submission to the Supreme Court, described Kerala as one of the most financially unhealthy states, citing numerous fiscal challenges.

The Centre, responding to Kerala’s legal action, echoed similar concerns in its affidavit to the apex court, highlighting Kerala’s precarious financial state and the multitude of fiscal vulnerabilities.

The Attorney General emphasized in the submitted note that state debts can impact the nation’s credit rating, and any default in debt servicing could tarnish India’s reputation and jeopardize its financial stability.

Referring to reports from the 12th Finance Commission, CAG, and RBI, the affidavit underscored Kerala’s deteriorating debt situation and stressed fiscal framework. The RBI identified Kerala among the five states urgently requiring corrective measures.

The Centre pointed out that Kerala’s own white paper from June 2016 acknowledged a severe financial crisis, highlighting insufficient borrowing to cover day-to-day expenses and lacking resources for capital expenditure.

Furthermore, a study by the Indian Institute of Management, Kozhikode in 2017 highlighted deficiencies in public finance management in Kerala.

Analyzing Kerala’s current financial metrics, the Centre noted a concerning increase in outstanding liabilities as a percentage of Gross State Domestic Product (OSDP) and a rising interest payment-to-revenue ratio, exceeding the 14th Finance Commission’s recommendation.

The Centre’s response, filed against Kerala’s petition, addressed the alleged interference in state finances, particularly through imposed borrowing limits, which hinder the state’s ability to meet its budgetary commitments.

In its petition, the Kerala government argued against such interference, asserting its constitutional right under Article 293 to manage borrowing in alignment with fiscal autonomy. It criticized the imposition of net borrowing ceilings, restricting access to various funding sources, including open market borrowings.