Off-budget borrowings refer to loans that are not explicitly included in the government's budget. Typically, these loans are raised by public sector entities or through special purpose vehicles. Importantly, they do not contribute to the official fiscal deficit, allowing for borrowing beyond the established fiscal limits. This mechanism enables expenditure without an immediate impact on the government’s balance sheet.
In India, off-budget borrowings became rampant among states due to the pressing need for additional funds to support development projects and welfare schemes. Since these borrowings were not subject to direct budgetary oversight, they provided a convenient tool for states to finance deficits without overtly increasing their official debt figures.
Off-budget borrowings pose significant concerns as they can obscure the true fiscal health of the government. This lack of transparency can lead to decreased accountability in public finance. Furthermore, these borrowings create long-term liabilities that may threaten the country's financial stability and credit ratings. Ultimately, these debts require servicing, which could necessitate higher future taxes or reductions in government spending.
In March 2022, the Centre took decisive steps to curb off-budget borrowing by including these expenditures within the regular borrowing ceiling. This move aimed to bring such borrowings under direct oversight and prevent states from excessive borrowing outside their budgeted amounts, thereby ensuring enhanced fiscal discipline.
Following the Centre's clampdown, there has been a significant reduction in off-budget borrowings. Although many states initially resisted this directive, they eventually accepted it. This shift has led to a more transparent and disciplined fiscal management system across states.
The reduction in off-budget borrowings has contributed to greater transparency in India’s balance sheet. With a commitment to reducing both the fiscal deficit and off-budget borrowings, the fiscal deficit for 2022-23 is projected at 2.9% while the combined fiscal deficit of the central and state governments is expected to be 5.9% of GDP. This indicates a positive trend in financial health and fiscal discipline within the country.
Q1. What are the implications of off-budget borrowings?
Answer: Off-budget borrowings can obscure the true fiscal condition of a government, leading to a lack of transparency and accountability. They can also create long-term financial liabilities that impact the country’s overall economic stability.
Q2. How has the Centre addressed off-budget borrowings?
Answer: The Centre included off-budget borrowings within the regular borrowing ceiling in March 2022, aiming to enhance oversight and prevent excessive state borrowing outside their budgets.
Q3. What was the response of states to the Centre’s measures?
Answer: Initially, many states resisted the Centre's measures to control off-budget borrowings. However, over time, they accepted the directive, leading to improved fiscal management.
Q4. How do off-budget borrowings affect fiscal discipline?
Answer: Off-budget borrowings can undermine fiscal discipline by allowing governments to fund expenditures without transparent accounting, leading to potential future financial burdens.
Q5. Is India’s financial health improving?
Answer: Yes, the reduction in off-budget borrowings has led to a more transparent fiscal situation, with projections indicating improved fiscal health and discipline in the coming years.
Question 1: What are off-budget borrowings?
A) Loans included in the government's budget
B) Loans not shown in the government’s budget
C) Loans given to private sectors
D) Loans for international projects
Correct Answer: B
Question 2: Why were Indian states using off-budget borrowings?
A) To fund international projects
B) To finance deficits without increasing official debt
C) For tax purposes
D) To invest in foreign markets
Correct Answer: B
Question 3: What did the Centre do in March 2022 regarding off-budget borrowings?
A) Increased the borrowing ceiling
B) Included off-budget borrowings in the regular ceiling
C) Eliminated off-budget borrowings
D) Reduced the loan amounts available
Correct Answer: B
Question 4: What is one consequence of off-budget borrowings?
A) Increased government transparency
B) Long-term financial liabilities
C) Decreased debt levels
D) Improved fiscal management
Correct Answer: B
Question 5: What projection was made for India’s fiscal deficit for 2022-23?
A) 5.9% of GDP
B) 2.9% of GDP
C) 10% of GDP
D) 3.5% of GDP
Correct Answer: B
Question 6: What is the primary goal of including off-budget borrowings in the regular ceiling?
A) To reduce taxes
B) To enhance oversight and fiscal discipline
C) To increase borrowing capabilities
D) To eliminate state borrowings
Correct Answer: B
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