Punjab and Tamil Nadu, among others, have managed to significantly lowered their off-budget borrowing (OBB) during fiscal year 2024-25 (FY25), the states’ report to the Finance Ministry showed. This is an important indicator of better fiscal management by the states.
Reporting as recorded by the Expenditure Department showed, while OBB declared by Punjab shrunk to just ₹3.78 crore in FY25 as against over ₹1,600 crore during FY24 and over ₹480 crore during FY23. Similarly, for Tamil Nadu the amount was around ₹28 crore in FY25 as against over ₹1,500 crore and ₹1,100 crore respectively during previous two fiscals.
Data here comprise OBB by state public sector companies, special purpose vehicles and other equivalent instruments, where principal and/or interest are to be serviced out of the state budgets and/or assignment of taxes cess or any other revenue declared by the state governments.
While states are required to keep the deficit below 3 per cent of GSDP (Gross State Domestic Products) from 2023-24 onward, the interest-free loans by the Centre are not included within this limit. States can carry forward unutilised borrowing space from previous years and also raise additional borrowing if they carry out reforms in the power sector. An additional borrowing of 0.5 per cent of GSDP is permitted if states undertake certain reforms in the power sector.
Central government has been reporting NIL in the Statement of Extra Budget Resources since FY24, which means no OBB on Centre’s book. In-fact after presentation of the Union Budget for FY24 by Finance Minister Nirmala Sitharaman, then Finance Secretary (now Cabinet Secretary) T V Somnathan had categorically said Union Budget for 2023-24 contains no off-Budget borrowing by the central government.
According to a discussion paper on finances of the central government (2019-20 to 2024-25) by PRS Legislative Research, OBB refers to borrowings that are not directly made by the government, but where principal and interest are serviced from the government budget. Such borrowings are typically raised by government owned entities such as public sector enterprises. As these borrowings are not part of the government budget documents, they lead to understatement of fiscal deficit.
In 2018 C&AG had noted that the central government had resorted to off-budget financing for items such as food subsidy bills and implementation of irrigation schemes. It recommended that the central government may put in place a framework to disclose off-budget financing. Since 2019-20, the central government has provided a statement disclosing off-budget borrowings raised by public enterprises. These were raised by: (i) issuing bonds by public enterprises which were serviced by the central government and (ii) providing loans to public enterprises from the NSSF.
For instance, between 2016-17 and 2020-21, loans worth ₹4.3 lakh crore were provided to the Food Corporation of India from the NSSF. They were provided in lieu of food subsidy dues owed by the Centre to the FCI. These loans to the FCI accounted for 67 per cent of the total off-budget borrowings raised during this period. Had these loans been included in the Centre’s borrowings, its actual fiscal deficit would have been higher than the reported fiscal deficit between 2016-17 and 2020-21.
In 2018-19 and 2019-20, the Centre’s fiscal deficit after accounting for off-budget borrowings would have been almost one percentage point higher than the reported fiscal deficit, the discussion paper said.