Off Budget Borrowings

Syllabus:GS3/Economy

Context

• Indian states are reducing reliance on off-budget borrowings, with the Centre tightening norms by including such loans within states’ fiscal limits under Article 293(3) of the Constitution.
  • Article 293(3) of the Constitution of India stipulates that a state cannot borrow money without the permission of the union government if it still owes a loan taken from or guaranteed by the union government.

Off-Budget Borrowings

• Off-budget borrowing also known as extra budget financing is used by the government to finance its expenditures while keeping the debt off from its annual statement. 
• Such borrowings are not counted in the fiscal deficit calculation, even though they have fiscal implications.

How are Off-Budget Borrowings Raised?

• The government asks implementing agencies to raise required funds from the market through loans or by issuing bonds.
  • Public Sector Undertakings (PSUs) and Special Purpose Vehicles (SPVs) are commonly used to raise such funds.
• These borrowings are typically directed towards subsidies, infrastructure, and welfare schemes.
• Concern: Off-budget financing allows governments to bypass fiscal discipline mandated under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.

Trends in Off-Budget Borrowings

• Off-budget borrowings surged during the pandemic and touched ₹67,181 crore in FY 2020-21, before moderating to ₹29,335 crore in FY 2024-25.
• In FY 2024-25, the top four states with the highest off-budget borrowings were:
  • Maharashtra: ₹13,990 crore
  • Karnataka: ₹5,438 crore
  • Telangana: ₹2,697 crore
  • Kerala: ₹983 crore

Government Actions

• Centre’s Restrictions: Since FY 2021-22, all off-budget loans via SPVs are treated as state borrowings and included in their net borrowing ceiling.
• Discontinuation at Central Level: The Union Government stopped its own off-budget borrowings from FY 2022-23.
• Special Assistance to States for Capital Investment (SASCI): Launched in FY 2020-21, it provides long-term, interest-free loans to states for infrastructure projects, encouraging them to shift away from opaque borrowings.

Source: LM