Government Budgets

What are Off-Budget Borrowings?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Off-budget borrowing

Mains level : Union Budget

Finance Minister is all set to present the Union Budget 2021 on February 1st with all eyeing on off-budget borrowings to reduce Fiscal Deficit.

Try this PYQ:

With reference to the Union Government, consider the following statements:

  1. The Department of Revenue is responsible for the preparation of Union Budget that is presented to the Parliament.
  2. No amount can be withdrawn from the Consolidated Fund of India without the authorization from the Parliament of India.
  3. All the disbursements made from Public Account also need authorization from the Parliament of India.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 2 only

(d) 1, 2 and 3

What are off-budget borrowings?

  • Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution that borrows on the directions of the central government.
  • Such borrowings are used to fulfill the government’s expenditure needs.
  • Such borrowings are a way for the Centre to finance its expenditures while keeping the debt off the books — so that it is not counted in the calculation of fiscal deficit.
  • 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.
  • As a result, a CAG report of 2019 pointed out that this route of financing puts major sources of funds outside the control of Parliament.

Eyes on fiscal deficit

  • One of the most sought after details in any Union Budget is the level of fiscal deficit.
  • It is essentially the gap between what the central government spends and what it earns. In other words, it is the level of borrowings by the Union government.
  • This number is the most important metric to understand the financial health of any government’s finances.
  • As such, it is keenly watched by rating agencies — both inside and outside the country. That 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 much would the borrowings be?

  • According to the last Budget documents, in the current financial year, the Centre was set to borrow Rs 5.36 lakh crore.
  • However, this figure did not include the loans that public sector undertakings were supposed to take on their behalf or the deferred payments of bills and loans by the Centre.

How are off-budget borrowings raised?

  • Issuance of Bonds: The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds.
  • Utilizing savings: For example, the 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.
  • Borrowing: Other PSUs have also borrowed for the government. For instance, public sector oil marketing companies were asked to pay for subsidized gas cylinders for PM Ujjwala Yojana beneficiaries in the past.
  • Bank sources: 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 fertilizer subsidy.

Its implications

  • Given the various sources of off-budget borrowing, the true debt is difficult to calculate.
  • For instance, it was widely reported that in July 2019, just three days after the presentation of the Budget, the CAG (cumulative aggregate growth) pegged the actual fiscal deficit for 2017-18 at 5.85% of GDP instead of the government version of 3.46%.
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