Off-Budget Financing: Extra-Budgetary Resources and Transparency Concerns

Detailed Explanation

1 Mechanisms of Off-Budget Financing

PSU borrowings for government schemes: The government directs a PSU to borrow from the market or from the National Small Savings Fund (NSSF) to fund a government scheme. The PSU's debt does not appear in the Union Budget fiscal deficit since it is the PSU's liability on paper. However, the government provides sovereign guarantee or budgetary support for repayment, making it a de facto government liability.

Special Purpose Vehicles (SPVs): SPVs are created to fund specific infrastructure projects off-balance sheet. The government provides equity or guarantees; SPV raises debt. This can be legitimate for commercially viable infrastructure but becomes problematic when used primarily to circumvent fiscal deficit disclosure.

National Small Savings Fund (NSSF) lending: NSSF collects small savings from the public and lends to states and designated entities. FCI's NSSF borrowings, used to fund food subsidy operations, were a major source of off-budget financing. FCI's NSSF loans reached approximately Rs 3.8 lakh crore by 2020.

Fertiliser bonds and oil bonds: In the 2000s, the government issued bonds to fertiliser and oil companies to compensate for under-recovery on subsidised products, deferring the fiscal cost.

2 Scale and Evolution in India

The scale of off-budget borrowings became a major concern by 2018-20. CAG reports pointed out that the Statement of Extra-Budgetary Resources, mandated under FRBM, was incomplete and did not capture all entities. The RBI's annual report on State Finances has similarly flagged rising state-level off-budget liabilities, particularly through DISCOM bailouts and state PSU borrowings.

The Centre's off-budget borrowings peaked at approximately Rs 1.62 lakh crore in 2018-19. Finance Minister Sitharaman in Union Budget 2021-22 announced elimination of off-budget financing and brought food subsidy payments to FCI fully on-budget — a significant transparency improvement.

3 CAG and Finance Commission Concerns

CAG findings: The Comptroller and Auditor General has consistently flagged: (i) the EBR statement in the budget documents is not comprehensive — several entities with central government exposure are excluded; (ii) contingent liabilities (guarantees) are not adequately disclosed and can crystallise into actual liabilities; (iii) off-budget borrowings effectively make the reported fiscal deficit an underestimate of the true fiscal stance.

15th Finance Commission: The FC recommended full and transparent disclosure of all off-budget liabilities — both at the Centre and state levels. It recommended that off-budget borrowings be included in computing fiscal deficit for purposes of assessing compliance with fiscal responsibility targets.

IMF-World Bank assessment: In fiscal transparency assessments, India has been urged to improve accounting of contingent liabilities and bring all government-backed borrowings within the fiscal reporting perimeter.

4 State-Level Off-Budget Financing

States use similar mechanisms: State PSU borrowings backed by state guarantees, DISCOM (power distribution company) debt (restructured under UDAY scheme), and SPV borrowings for urban infrastructure. The RBI has flagged that true state indebtedness may be 2-4% of GSDP higher than reported fiscal deficits when off-budget borrowings are included.

UDAY (Ujjwal DISCOM Assurance Yojana): Rs 2.32 lakh crore of DISCOM debt was brought on-budget in 2015-17, causing a one-time jump in state fiscal deficits. This is an example of transparency improving off-budget liabilities.

Important Concepts

• Contingent liabilities: Liabilities that arise only if certain events occur (e.g., a guarantee is invoked). Not shown in the fiscal deficit but represent fiscal risk.

• Sovereign guarantee: Government guarantee on borrowings of a PSU/SPV; converts off-budget borrowing into a potential on-budget liability.

• NSSF: National Small Savings Fund; collects postal savings and small savings; lends to states and designated entities at concessional rates.

• Implicit subsidy: When a government entity borrows at lower rates due to sovereign backing, the interest rate subsidy is an implicit off-budget outgo.

• Debt sustainability: IMF/World Bank assess a government's debt sustainability using the broadest measure of public debt, including off-budget liabilities.

• UDAY scheme: Taken DISCOM losses on-budget for state governments; example of bringing off-budget liabilities to light.

Current Relevance

Reduced but not eliminated: While the Centre has largely eliminated off-budget borrowings for food and fertiliser subsidies since 2021-22, concerns persist at the state level. Several states have guarantees outstanding that can materialise as liabilities.

PMGKAY and food security: The extension of Pradhan Mantri Garib Kalyan Anna Yojana (free food grain scheme) has significantly increased the on-budget food subsidy — a direct result of the transparency push, now fully reflected in fiscal deficit.

Infrastructure financing: The National Infrastructure Pipeline and PM GatiShakti rely partly on PSU borrowings and SPV structures. While largely legitimate, these need robust disclosure frameworks to prevent reversion to opacity.