Print Friendly, PDF & Email

Centre relaxes norms for adjusting states’ off-budget borrowings

 GSPaper-2

Syllabus: Government budgeting, issues related to planning and mobilization of resources etc

 

Source: Moneycontrol.com

 

Context:

  • The Centre has relaxed norms for adjusting states’ off-budget loans and said such liabilities of the last fiscal year can be adjusted against their borrowing ceilings for the next four years till March 2026.
    • The move will free up resources for states to fund their capital expenditures in the current fiscal year.
  • As per a study by Crisil Ratings, off-balance sheet borrowings by states are estimated to have reached a decadal high of 4.5 per cent of gross domestic product (GDP), or about Rs 7.9 lakh crore, in 2021-22.

 

Off-budget borrowings:

●       It refers to loans taken by state government entities, special purpose vehicles, etc, where principal and interest would be repaid from the state government’s own budget, instead of the cash flows or revenues generated by the borrowing entity.

●       Such borrowings bypass the net borrowing ceiling fixed for states in a fiscal year by routing loans outside the state budget through government-owned companies or statutory bodies.

●       Since the responsibility for repayment lies with states, it adversely impacts their revenue and fiscal deficit.

 

Key Highlights:

  • States restored off-budget borrowing to fund capital expenditure: Over the last two years, many states have resorted to off-budget borrowing to fund their capital expenditures and minimize the impact of the economic downturn induced by COVID-19.
    • As per norms, state governments are required to take the Centre’s approval for fresh borrowing over the limit set for a particular financial year.
  • Relief to states: ICRA Chief Economist said the modification regarding off-budget borrowings is likely to provide substantial relief to some states and allow them additional borrowing space in the current fiscal year.
  • Off-budget borrowings are to be equated with the states’ own debt: To bring transparency to state finances, the Centre informed states that off-budget borrowings are to be equated with the states’ own debt and any such fund raised by the governments in 2020-21 and 2021-22 would need to be adjusted out of the borrowing ceiling this year.
  • Ceiling on borrowing: The Centre has fixed the net borrowing ceiling of states at Rs 8,57,849 crore or 3.5 per cent of GSDP. States are also eligible for additional borrowing of 0.50 per cent of GSDP linked to reforms in the power sector.

 

Reasons for rising in off-budget borrowings:

  • Constrained revenue growth: Due to the pandemic-induced slowdown and increasing revenue expenditure have led to states’ fiscal deficits rising to 4 per cent of GSDP, well above the historical level of 2-3 per cent has been seen for the most part of the last decade.
    • This has reduced the wherewithal of states to directly fund the entities they own.
  • No prior approval of central government: Even if states wanted to do so by borrowing more, they can’t without the explicit approval of, and beyond the limits set by, the central government.
    • But states don’t need prior central consent to guarantee the loans and advances, and bonds issued by their entities.
    • Also, the ceiling on guarantees is self-determined and varies from state to state

 

Insta Links:

Government Budgeting

 

Practice Questions:

Q. Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets. (UPSC 2021)

 

Q. With reference to Off-budget borrowings, consider the following statements:

  1. The principal for such borrowings is paid by the state and interest is paid by the central government.
  2. It can not bypass the net borrowing ceiling fixed for states.

Which of the statements given above is/are correct?

a. 1 only

b. 2 only

c. Both 1 and 2

d. Neither 1 nor 2

Ans: (d)

Justification:

Refer to the table above