Central Idea

• In recent years, India’s fiscal management has faced the significant challenge of off-budget borrowings by various states.
• These borrowings, while providing short-term financial relief, have raised concerns regarding the overall fiscal health and transparency of the country’s finances.

Understanding Off-Budget Borrowings

• Definition: Off-budget borrowings are debts incurred not directly by the government but by public sector units or special purpose vehicles, with principal and interest serviced from the budget.
• Legislative Oversight: These borrowings are not subject to legislative scrutiny and are outside the budget.
• FRBM Act Bypass: They allow governments to circumvent borrowing limits set under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.

How are off-budget borrowings raised?

• Issuance of Bonds: The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds.
• Utilizing savings: For example, the food subsidy is one of the major expenditures of the Centre. In the Budget presentation for 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. The shortfall was met through a loan from the National Small Savings Fund.
• Borrowing: Other PSUs have also borrowed for the government. For instance, public sector oil marketing companies were asked to pay for subsidized gas cylinders for PM Ujjwala Yojana beneficiaries in the past.
• Bank sources: Public sector banks are also used to fund off-budget expenses. For example, loans from PSU banks were used to make up for the shortfall in the release of fertilizer subsidy.

Prevalence of Off-Budget Borrowings

• Recent Trends: Off-budget borrowings were rampant until recently, with significant amounts in states like Andhra Pradesh, Telangana, Kerala, Chhattisgarh, and Sikkim.
• Magnitude: Estimates show ₹2.79 trillion in 2020-21 and ₹1.71 trillion in 2021-22.
• Fiscal Transparency Concerns: The 15th Finance Commission and the Comptroller and Auditor General of India (CAG) have flagged these borrowings for undermining fiscal transparency and sustainability.

Centre’s Stance on Off-Budget Borrowings

• Past Practices: The Centre had substantial off-budget borrowings, reaching ₹1.62 trillion in 2018-19.
• Recent Changes: Finance Minister Nirmala Sitharaman announced the end of such borrowings in the Union Budget for 2020-21, reducing them significantly in subsequent years.

Centre’s Measures against State Off-Budget Borrowings

• New Policy: In March 2022, the Centre declared that state off-budget borrowings would count towards their regular borrowing ceiling.
• Impact on States: This policy limited states’ borrowing capacity, leading to cash flow issues in some states and prompting protests and threats of legal action.

Current State of India’s Balance Sheet

• Reduction in Off-Budget Borrowings: States’ off-budget borrowings are expected to decrease to ₹18,499 crore in 2022-23.
• Overall Fiscal Health: True fiscal sustainability requires both the Centre and states to align their deficits with FRBM Act targets.
• Deficit Targets: The FRBM Act aims for the elimination of a revenue deficit and a fiscal deficit of 3% of GDP. However, in 2023-24, 11 states are projected to have a revenue deficit, and the aggregate fiscal deficit of all states is expected to be 3.1%. The Centre’s revenue and fiscal deficits are anticipated to be 2.9% and 5.9% of GDP, respectively.

Conclusion

• The clampdown on off-budget borrowings is a step towards greater fiscal discipline in India.
• While it has led to immediate challenges for some states, the long-term goal is to enhance fiscal transparency and sustainability in line with the FRBM Act.
• Achieving these targets will be crucial for the overall health of India’s economy.

Try this PYQ:

With reference to the Union Government, consider the following statements:

1. The Department of Revenue is responsible for the preparation of Union Budget that is presented to the Parliament.
2. No amount can be withdrawn from the Consolidated Fund of India without the authorization from the Parliament of India.
3. All the disbursements made from Public Account also need authorization from the Parliament of India.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 2 only

(d) 1, 2 and 3

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