Off-Budget Borrowings: Fiscal Insights in India

  Dec 01, 2023

Off-Budget Borrowings in India

What are off-budget borrowings?

Off-budget borrowings are loans that are not directly shown in the government’s budget, typically raised by public sector entities or through special purpose vehicles, and do not count towards the official fiscal deficit. They enable borrowing beyond the set fiscal limits, allowing for expenditure without immediate impact on the government’s balance sheet.

Why were off-budget borrowings by Indian states rampant?

Off-budget borrowings by states were rampant due to the need for additional funds beyond allocated budgets for development projects and welfare schemes. These borrowings were not subjected to direct budgetary oversight, which made them a convenient tool for states to finance their deficits without overtly increasing their official debt figures.

Why should off-budget borrowings be a concern?

Such borrowings can mask the true fiscal health of the government, leading to a lack of transparency and accountability in public finance. They can also create long-term liabilities that can affect the country’s financial stability and credit ratings, as these debts will eventually need to be serviced or paid off, potentially leading to higher future taxes or reduced government spending.

What measures did the Centre implement to curb off-budget borrowing?

The Centre, in its March 2022 announcement, included off-budget borrowings in the regular borrowing ceiling, thereby bringing such expenditures under direct oversight. This was meant to prevent states from excessive borrowing outside of their budgeted amounts and ensure better fiscal discipline.

What has been the outcome of these remedies?

As a result of the Centre’s clampdown, off-budget borrowings have significantly reduced, with many states initially resisting but eventually accepting the Centre’s order. This has led to a more transparent and disciplined fiscal management system.

Is India’s financial health improving as a result?

The reduction in off-budget borrowings has helped India’s balance sheet become more transparent, with a commitment to reduce the fiscal deficit and off-budget borrowings. For 2022-23, India’s fiscal deficit is projected at 2.9% and the combined fiscal deficit of the central and state governments at 5.9% of GDP, indicating an improvement in financial health and fiscal discipline. Study our Indian Economy book for more details.


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