‘Off-Budget Borrowing’

Published: 1st Feb, 2021

In order to restrict the fiscal deficit to a respectable number, “off-budget borrowing” is the easiest resort for the government.

Context

In order to restrict the fiscal deficit to a respectable number, “off-budget borrowing” is the easiest resort for the government.

About

Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution which borrows on the directions of the central government.
Such borrowings are used to fulfil the government’s expenditure needs.
But since the liability of the loan is not formally on the Centre, the loan is not included in the national fiscal deficit.
This helps keep the country’s fiscal deficit within acceptable limits.

CAG Report, 2019

A Comptroller and Auditor General report of 2019 points out, this route of financing puts major sources of funds outside the control of Parliament.
Such off-budget financing is not part of the calculation of the fiscal indicators despite fiscal implications.

Background

The Union Budget is to be presented on February 1.
The most sought after details in the Budget is the level of fiscal deficit, which is keenly watched by rating agencies, both inside and outside the country.
This number is the most important metric to understand the financial health of any government’s finances.
This is why most governments want to restrict their fiscal deficit to a respectable number.
One of the ways to do this is by resorting to “off-budget borrowings”.

How are off-budget borrowings raised?

Implementing agencies: The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds.
- For example, food subsidy is one of the major expenditures of the Centre.
  - In the Budget presentation for 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. This allowed the Centre to halve its food subsidy bill from Rs 1,51,000 crore to Rs 77,892 crore in 2020-21.
- Other PSUs: Other public sector undertakings have also borrowed for the government.
  - For instance, public sector oil marketing companies were asked to pay for subsidised gas cylinders for Pradhan Mantri Ujjwala Yojana beneficiaries in the past.
- PSBs: Public sector banks are also used to fund off-budget expenses.
  - For example, loans from PSU banks were used to make up for the shortfall in the release of fertiliser subsidy.

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