Equating states’ off-budget borrowings with their debt will clarify extent of indebtedness

News: This year, off-budget borrowings by the states will be equated with the states’ own debt.

What are off-budget borrowings?

Off-budget borrowings refer to loans taken by state govt. entities, special purpose vehicles, etc. These loans are serviced through the state government’s own budget, instead of revenues generated by the borrowing entity.

As per the Department of Expenditure, using off-budget borrowings, states are effectively breaching the ceiling set by the Centre. Thus, states are surpassing the fiscal deficit limits set under state Fiscal Responsibility and Budget Management Acts,

What are the changes?

Under Article 293 (3) of the Constitution, if the state government has taken loan from the central government, it needs to take the Centre’s permission for fresh borrowing.

The central government decides fiscal deficit target for state governments for 5 years, after considering the finance commission’s recommendations. Thus, the net borrowing ceiling of states is defined by the central government.

The borrowing ceiling set in this manner acts as a soft constraint to that year’s state-wise fiscal deficit.

However, earlier, off-budget borrowings were not considered in this calculation. But, from now on, all incremental off-budget borrowings from 2020-21 will be adjusted from this year’s ceiling.

Implications of changes

It will lead to large downward adjustments in some States’ effective borrowing room.

It will bring in much-needed fiscal transparency in an area that has been cloaked in opacity.

States will find it difficult to fund their expenditures.

Source: This post is created based on the article “Equating states’ off-budget borrowings with their debt will clarify extent of indebtedness” published in Indian Express on 11^th May 2022.