Off Budget Loans

Off Budget Loans

Subject :Economy

Section: Fiscal Policy

Context:

The Centre on Wednesday relaxed norms for adjusting states’ off-budget loans to fund their capital expenditure.

Details:

• Centre earlier  informed states that off-budget borrowings were 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.
• However, now  such liabilities of the last fiscal year can be adjusted against the state’s  borrowing ceilings of the next four years till March 2026.

Concept:

Off-budget borrowings:

• Off-budget borrowings are loans that are taken not by the Government directly, but by another public institution which borrows on the directions of the central government or state government. 
• Such borrowings are used to fulfil the government’s expenditure needs. These items constitute the “off-budget borrowings” because these loans and deferred payments are not part of the fiscal deficit calculation.
• This helps keep the country’s fiscal deficit within acceptable limits.
• The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds.
•  For example:
  • Loans by Food Corporation of India for food subsidy.
  • Public sector oil marketing companies were asked to pay for subsidised gas cylinders for Pradhan Mantri Ujjwala Yojana beneficiaries in the past.
  • Loans from PSU banks were used to make up for the shortfall in the release of fertilizer subsidy, the recapitalisation of banks and capital expenditures of the Ministries of Railways and Power.

In case of the state government -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 .
• 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.
• But states don’t need prior central consent to guarantee the loans and advances, and bonds issued by its entities. Also, the ceiling on guarantees is self-determined and varies from state to state.