Off-Budget Borrowings [UPSC Economy Notes]

Tamil Nadu’s off-budget borrowings are estimated to be ₹746.12 crores in fiscal 2022-23 compared to ₹594.88 crores in 2021-22, according to data shared in Parliament. In this context, what are off-budget borrowings? What are their need and significance? To understand this topic from a UPSC perspective, read on.

What are Off-Budget Borrowings?

Off-budget borrowing is loans obtained by government entities such as PSUs or special purpose vehicles, on behalf of the government to finance the expenditure. 

• According to the Controller and Auditor General (CAG) of India, these borrowings are not included while computing the debt and the fiscal deficit of the state governments. 
• The State government is responsible for paying the loan and servicing the debt from its budget.

What is the Need for Off-Budget Borrowings?

• For developmental activities, the ceiling of borrowing decided by the centre (3.5 % of GSDP) may not be sufficient for welfare measures or the commitment of the government. So, the State fulfils its financial need through Off-Budget Borrowings. 
  • For example, Telangana state has undertaken off-budget borrowing for the completion of irrigation projects.
• Some states have accused the centre of continuing to increase taxes on non-divisible pools like Cess and Surcharge. This goes against the federal spirit and reduces the financial share of the State government and leaves no other choice than Off-Budget borrowing.
• After the Covid-19 crisis, the revenue of States has not increased as expected, at the same time spending on welfare activities has increased manifold. This necessitates Off-Budget Borrowings.
• The culture of freebies among the states is also responsible to some extent for this.

Off-Budget Borrowings Concerns

The negative fallout associated with off-budget borrowings is as under.

• It may push the State into a debt crisis and also create a burden on future generations.
• Bypassed Constitutional Limit: As per the Constitution, the executive needs the approval of the legislature for any spending. Here, in the process of Off-Budget borrowing, executive financial accountability is missing.
• Off-Budget Borrowings became a tool to dodge the ceiling set by the centre for the borrowing limit.
• It also bypasses the FRBM target and in the long run impacts the sovereign credit rating.

Way Forward:

• Working with the spirit of Cooperative Federalism: The Centre needs to broaden the divisible pool of income, and needs to constructively use the GST Council, and the Inter-State council to solve the centre-state financial concern.
• Broaden the tax bases of States: Need to broaden the tax bases of States as suggested by various committees and reports.
• Fiscal autonomy for states: The state needs to be provided more fiscal autonomy due to back-to-back disruptions like Covid-19 and economic slowdowns. However, at the same time, transparency also needs to be maintained for showing the State’s market borrowing.

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