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The Supreme Court proceeded with hearing a suit filed by the State of Kerala against the Centre for alleged arbitrary interference in its financial matters, following unsuccessful negotiations between the two parties.
Earlier, Kerala Governor sought for the Presidential imposition of a financial emergency in the State under Article 360(1) of the Constitution due to dwindling situation of finances in the State.

What is Financial Emergency?

Enshrined in Article 360: It is a vital provision aimed at addressing severe financial crises threatening India’s economic stability.
Declaration and Authority: It can be declared by the President upon satisfaction that the financial stability or credit of India or any part of its territory is under threat.
CoM Advice: The declaration is made based on the advice of the Council of Ministers, reflecting the collective responsibility of the executive branch.

While the President can proclaim a Financial Emergency, its extension beyond two months needs approval from both Houses of Parliament.
Once approved, it remains in effect until revoked by the President, allowing for flexible management of financial crises.

The Centre’s executive authority expands significantly during a Financial Emergency, enabling it to issue directives to states on financial matters.
Centralization of fiscal policies occurs, with the President empowered to reserve money bills passed by state legislatures for consideration.
Austerity measures, including salary and allowance reductions for public officials, can be implemented to address economic challenges.

38th Amendment Act (1975) made the President’s decision final and immune from judicial review.
However, the 44th Amendment Act (1978) allowed for judicial scrutiny.
This amendment ensured checks and balances within the constitutional framework, preventing unchecked executive authority.

Financial Emergencies have been sparingly invoked in India’s history, despite facing significant financial crises such as in 1991.
The cautious utilization of this provision underscores the importance of aligning its implementation with democratic principles and federalism.

The Supreme Court’s intervention in the Kerala-Centre financial dispute underscores the importance of cooperative federalism in addressing intergovernmental conflicts.
The forthcoming hearings aim to reconcile differences and ensure the equitable distribution of resources, fostering harmonious relations between the Centre and states.