Off-Budget Borrowings Explained

Off budget borrowings UPSC: Relevance

• GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Fiscal deficit of India: Context

• Recently, the Union Government has relaxed norms for adjusting states off-budget loans and said such liabilities of last fiscal year can be adjusted against their borrowing ceilings of next four years till March 2026.

Off budget borrowings: Key points

• The step is expected to free up resources for states to fund their capital expenditures in current fiscal year.
• A few months ago, the Union Government has stated that off-budget borrowings of the states are to be equated with the states’ own debt, to bring transparency in state finances.

What is off budget borrowings?

• Off-budget borrowings are loans that are taken not by a government directly, but by another public institution which borrows on the directions of the government.
• Such borrowings are used to fulfil the government’s expenditure
• The liability of the loan, however, is not formally on the Centre, and the loan is not included in the national fiscal deficit.
• This helps keep the country’s fiscal deficit within acceptable limits.

Off budget borrowings in India

• According to the last Budget documents, in the current financial year the Union government was set to borrow Rs 5.36 lakh crore.
• However, this figure did not include the loans that public sector undertakings were supposed to take on their behalf or the deferred payments of bills and loans by the Centre.
• These items constitute the “off-budget borrowings” because these loans and deferred payments are not part of the fiscal deficit calculation.
• In 2019, a Comptroller and Auditor General report said that this route of financing puts major sources of funds outside the control of Parliament.

Off budget borrowings: Significance

• Fiscal deficit gives the level of borrowings by the Union government.
• Fiscal deficit is the most important metric to understand the financial health of any government’s finances.
• Due to this reason, it is keenly watched by rating agencies — both inside and outside the country.
• That is why most governments want to restrict their fiscal deficit to a respectable number.
• Off-budget borrowings are a way for the Centre to finance its expenditures while keeping the debt off the books — so that it is not counted in the calculation of fiscal deficit.

Raising of funds via off-budget borrowings

• The government can ask any implementing agency to raise the required funds from the market through loans or by issuing bonds.
• In the Budget 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 (NSSF). This led to halving of the food subsidy of Union Government.
• Similarly, public sector oil marketing companies were asked to pay for subsidised gas cylinders for Pradhan Mantri Ujjwala Yojana beneficiaries in the past.
• Similarly, loans from PSU banks were used to make up for the shortfall in the release of fertiliser subsidy.

What if we add the off-budget borrowings to the fiscal deficit?

• If we consider the amount borrowed from the NSSF only for 2020-21, the fiscal deficit would have gone up by Rs 40,000 to Rs 50,000 crore in absolute terms.

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