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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.

 

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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.

 

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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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