The Kerala government had filed a suit against the Centre under Article 131 of the Constitution, contesting the Union's norms on borrowing limits and highlighting the unique financial landscape of the state.

The bench, comprising justices Surya Kant and K.V. Viswanathan, today said the Centre had already agreed to provide around ₹13,000 crore to the state government for financial assistance. 

The court accepted the Union government's argument that if a state overutilizes its borrowing powers in a fiscal year, there could be a corresponding reduction in the following years.

The bench referred the case to the five-judge constitutional bench to address broader questions involving the interpretation of Article 131 and 293 of the Constitution. 

Under Article 131, the SC has jurisdiction over legal issues originating between the Centre and states, while Article 293 grants states the power for external borrowing and the extent to which the Union can regulate it.

Additionally, the scope of judicial review concerning fiscal policy will be examined by the larger bench. Since Article 293 has not been authoritatively interpreted before, the bench deemed it appropriate to refer the matter to a five-judge bench for further consideration.

A top court bench had reserved the verdict on 22 March following an extensive hearing that spanned over two consecutive days.

Both Kerala and the Union government urged the court to pass an interim order in the case before the conclusion of the current financial year on 31 March after several rounds of talks failed to yield an agreement.

Kerala had initially requested the Centre's approval to borrow ₹19,351 crore. While the Centre had agreed to allow an additional borrowing of ₹13,608 crores, it insisted that Kerala withdraw the legal suit. However, the court intervened, stating that the Centre cannot impose conditions on Kerala to withdraw the lawsuit.

Subsequently, Kerala rejected the Centre's offer of ₹5,000 crore as a one-time measure, citing various conditions. Instead, the state demanded a minimum of ₹10,000 crore as a one-time measure, arguing that the proposed amount was insufficient to meet essential obligations such as public fund disbursements, pensions, and pay revisions.

During the hearing, senior advocate Kapil Sibal representing Kerala argued that the Centre's restrictions constituted executive overreach, emphasizing Kerala's constitutional authority to determine its budget and borrowing needs. Sibal highlighted the significant reduction in Kerala's borrowing from the Union government post-liberalization and objected to the Union's interference in the state's financial affairs.

In response, additional solicitor general N. Venkataraman contested Kerala's claims, alleging misrepresentation of figures and pointing out the state's consistent over-borrowing in recent years. He raised concerns about Kerala's macroeconomic stability and the potential adverse effects of granting the requested ₹10,000 crore.

According to the Union government, any financial stress faced by Kerala was due to mismanagement, citing substantial financial resources provided to the state, including payments to meet the GST compensation shortfall.

The Union government noted the importance of public finance management in maintaining India's credit rating. Finance minister Nirmala Sitharaman had clarified in Parliament in December that there was no proposal to relax rules on state governments' borrowing capacity for FY24, including Kerala's.