UPSC Daily Editorial Analysis | 11 May 2022

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What the article is about?

  • Talks about the recent change made by adding the off-budget borrowings to state’s book.

Syllabus: GS-III Indian Economy, Fiscal federalism

Off-budget borrowing:

  • Off-budget borrowings by a state government refer to loans taken by its entities, special purpose vehicles, etc., which are expected to eventually be serviced through the state government’s own budget, instead of the cash flows or revenues generated by the borrowing entity.
    • Anecdotal evidence suggests that such loans have proliferated in some states in recent years.
    • However, hard data on such loans is exceedingly difficult to excavate and consolidate to arrive at a comprehensive understanding of its magnitude.
    • Given the lack of data, we are unable to ascertain the state-wise extent of incremental off-budget borrowings that will be adjusted this year.
    • Regardless, this poses a downside to our estimate of gross state development loans (SDL) issuances of Rs 8.4 lakh crore this year.

Net-borrowing ceiling:

  • At the beginning of every year, the Union government communicates to state governments how much they are allowed to borrow (their net borrowing ceiling).
    • But this year there have been some changes.
      • Most critically, states’ off-budget borrowings, routed through state-owned entities, are now being equated with the state governments’ own debt.
      • This will shed light on a segment of state debt that has escaped the Centre’s oversight in the past.
      • Considering the proliferation of off-budget borrowings since the pandemic started, some state governments are likely to find this new missive challenging to comply with.
  • Under Article 293 (3) of the Constitution, state governments are required to take the Centre’s permission for fresh borrowing, if they are indebted to the Government of India.
    • A fiscal deficit target is typically recommended by the Government of India-appointed finance commission for a five-year period and accepted or modified by the Centre.
    • The base fiscal deficit is usually defined in terms of a percentage rate, which is uniformly applicable to all state governments.
    • This is then applied to the Centre’s estimate of each state’s gross state domestic product (GSDP) for a particular fiscal year to determine the absolute net borrowing ceiling for that year.

Impact on State finance:

  • This year, the communication from the Centre has clarified that off-budget borrowings are to be equated with the states’ own debt.
  • Moreover, incremental off-budget borrowings that state governments have undertaken in the last two years (2020-21 and 2021-22) will need to be adjusted out of the borrowing ceiling this year.
    • This equating of off-budget borrowings with the state’s own debt is a watershed decision for state finances.
  • Undoubtedly, this is a welcome move as it will bring in much-needed fiscal transparency in an area that has been cloaked in opacity.

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