Off-budget borrowings (OBBs) refer to loans obtained by government entities, such as PSUs or special purpose vehicles, on behalf of the government to finance its expenditure, which are not reflected in the budget for that year. Thus, OBBs are not part of the calculation of the fiscal indicators despite fiscal implications.
Impact of Off-Budget Borrowings:
• Complicate the fiscal policy decisions: Deficiencies in fiscal reporting due to OBBs make it difficult to accurately assess the quality of fiscal spending, use fiscal policy as a tool for economic development, and correctly prioritise the expenditures.
• Impact on other crucial projects: OBBs put funding sources of government’s crucial infrastructure projects beyond the oversight and control of the legislature. This may adversely affect the accountability of the government.
• Financial implications on state’s budget: The Government has to repay the debt and/or service the debt from its budget which involves payment of interest on recurring basis and repayment of the borrowings from budget as and when it is due.
• Raise the cost of borrowing: OBBs lead to the crowding-out effect and the rise in bond rates, which might raise the cost of borrowing for the private sector and stifle economic expansion. According to a CAG report (2022), large off-budget borrowing can lead to a debt trap.
• Legal violation: OBBs also violate the spirit of the Fiscal Responsibility and Budget Management (FRBM) Act and the principle of fiscal prudence and inter-generational equity.
Measures that can be taken to address this issue:
• Voluntary disclosure: State governments should disclose its off-budget borrowings to ensure transparency and accountability with regard to fund management and compliance with FRBM norms. o The 14th Finance Commission also endorsed full disclosure of extrabudgetary borrowings in the interest of transparency, and recommended they be eliminated in a timebound manner.
• Legal measure: A Public Finance Management(PFM) law that applies to both state and centre is the need of the hour. It should cover fiscal responsibility, the annual budget, financial management, reporting and accounting, and legislative and executive oversight.
• Regulation by the Union government: The Union government should use its powers under Article 293 to mandate states to transparently report their off-budget operations.
• Institutional setup: To address the issue of unabated and unreported borrowings, a Fiscal Council should be setup to anchor, collate, and coordinate fiscal reporting in the country.
OBBs thus can be a double-edged sword. While it offers some flexibility in financing government projects, the lack of transparency and potential for fiscal indiscipline can pose significant risks.