State’s fiscal space

Off-budget borrowings

Off-budget borrowings or off-budget financing generally refer to use of those financial resources by the Government for meeting expenditure requirements, which are not reflected in the budget for seeking grant/appropriation, hence remaining outside legislative control. These are financed through Government owned public sector enterprises, which raise the resources through market borrowings on behalf of the Government.

However, the Government is to repay the debt or service the debt from its budget. Therefore, off-budget borrowings involve 

  • Payment of interest on recurrent basis and 
  • Repayment of the borrowings from budget as and when it is due.

Reasons for rise in Off-budget borrowings:

  • Constrained revenue growth due to the pandemic-induced slowdown and increasing revenue expenditure have led to widening of states’ fiscal deficits. This has reduced the wherewithal of states to directly fund the entities they own.
  • Even if states wanted to borrow more, they couldn’t without the explicit approval of, and beyond the limits set by, the central government.

Borrowing by the States:
Article 293(3): A State cannot raise any loan without the consent of the Government of India if there is still outstanding any part of a loan which has been made to the State by the Government of India, or in respect of which a guarantee has been given by the Government of India. A consent under this clause may be granted by the centre subject to some conditions.The Centre has allowed States to borrow up to 3.5% of their respective state GDP and an additional 0.5% if they implement mandated power sector reforms. 

Centre’s norms on Off-budget borrowings:

The off-budget debt was subjected to strict oversight after the Centre noticed many states were taking loans through their institutions, which was resulting in an incorrect assessment of their finances.  

  • The Centra had noticed in FY22 that such off-budget borrowings would be considered as borrowings made by the state itself for the purpose of the Centre issuing its consent under Article 293(3) of the Constitution of India. 
  • The Centre has also cleaned up its own off-budget borrowings by repaying loans such as those taken by the Food Corporation of India.

However, following the protests from several states, the Centre allowed four years till March 2026 to adjust their accumulated off-budget borrowings.

Interest free Long-term loans for Capex:

Union budget 2023-24 has proposed to continue with the 50-year interest-free loan to state governments that aid infrastructure investment. Most of it would be at the discretion of states, while parts of the expenditure will also be linked to conditions like

  • Scrapping old government vehicles
  • Urban planning reforms
  • Financing reforms in urban local bodies to make them creditworthy for municipal bonds
  • Constructing unity malls would focus on the sale of handicrafts, ‘one district, one product’ items, and GI products. 

Besides, a part has to be directed at creating libraries as well as digital infrastructure, among others. 

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