Mint Primer | Off-budget borrowing: is it behind us now? | Mint

Mint Primer | Off-budget borrowing: is it behind us now?

In the Union Budget for 2020-21, finance minister Nirmala Sitharaman came out with a statement on extra budgetary resources and made a commitment that the Centre will clean its balance sheet. (AFP)
In the Union Budget for 2020-21, finance minister Nirmala Sitharaman came out with a statement on extra budgetary resources and made a commitment that the Centre will clean its balance sheet. (AFP)

Summary

  • Off-budget borrowings by states rose sharply in 2020-21 and 2021-22. Worried, the Centre cracked down on the habit in March 2022

Off-budget borrowings by states rose sharply in 2020-21 and 2021-22. Worried (they widen the fiscal deficit), the Centre cracked down on the habit in March 2022 and they have decreased. Mint looks at off-budget borrowings and their implications.

What are off-budget borrowings?

Borrowings that are not directly made by the government, but the principal and the interest are serviced from the budget qualify as off-budget. These debts are typically raised by a public sector unit, or a special purpose vehicle floated by the government. As these borrowings are outside the budget, they escape legislative oversight. They also enable governments to bypass the borrowing limits set under the Fiscal Responsibility and Budget Management (FRBM) Act, which aims to institutionalize fiscal discipline and ensure better management of public funds for both the Centre and the states.

How rampant are such borrowings?

They were rampant until recently. Andhra Pradesh, Telangana, Kerala, Chhattisgarh and Sikkim resorted to such borrowings in a big way. Studies put off-budget borrowings in 2020-21 at 2.79 trillion and in 2021-22 at 1.71 trillion. One study estimated that Telangana’s off-budget borrowing in 2021-22 was 30% of its total borrowings that year. For Kerala it was 22%, Chhattisgarh 17% and Andhra Pradesh 12%. The 15th Finance Commission and the Comptroller and Auditor General of India (CAG) repeatedly flagged these borrowings saying they subverted fiscal transparency and threatened fiscal sustainability.

 

Doesn’t the Centre resort to such borrowings too?

It doesn’t anymore. In 2018-19, it was as high as 1.62 trillion. In the Union Budget for 2020-21, finance minister Nirmala Sitharaman came out with a statement on extra budgetary resources and made a commitment that the Centre will clean its balance sheet and end off-budget borrowings which dropped to 752 crore in 2021-22 and to zero in 2022-23.

How did the Centre clamp down on states?

The Centre in March 2022 announced that states’ off-budget borrowings will be included in determining their regular borrowing ceiling. So, off-budget borrowings as of 2021-22 will now be adjusted against states’ net borrowing ceilings between 2022-23 and 2025-26. This severely crimped the ability of states to borrow, triggering cash flow problems in Andhra Pradesh and Kerala. Many states protested, a few threatened legal action, but they have eventually accepted the Centre’s order.

Is India’s balance sheet any better now?

Only to the extent of off-budget borrowings. States’ off-budget borrowings will reduce to 18,499 crore in 2022-23. However, India’s finances can become truly sustainable only when the Centre and states reduce their deficits in line with the FRBM Act. The Act seeks to eliminate revenue deficit and stipulates the fiscal deficit at 3% of GDP. In 2023-24, 11 states will have a revenue deficit, and aggregate fiscal deficit of all states will be 3.1%. The Centre’s revenue deficit is expected at 2.9% and fiscal deficit at 5.9% of GDP.

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