Brief Context
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. 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.
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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