The Finance Ministry has relaxed norms for adjusting States’ off-budget loans. Off-budget borrowing done by States up to 2020-21 may not be adjusted and only those done in 2021-22 can be adjusted over the next four years.
This relaxation will free up resources for States to fund their capital expenditure in the current fiscal.
About Off-budget borrowings
- Off-budget borrowings refer to loans taken by State government entities, special purpose vehicles, etc, where principal and interest would be repaid from State government’s own budget, instead of the cash flows or revenues generated by the borrowing entity.
- Such borrowings bypass the yearly net borrowing ceiling fixed for States.
- The responsibility for repayment lay with State governments . It adversely impacts their revenue and fiscal deficit.
- At the beginning of every year, the Union government communicates to state governments how much they are allowed to borrow (their net borrowing ceiling).
- The Centre has fixed the net borrowing ceiling of states at Rs 8.57lakh crore or 3.5 per cent of GSDP. States are also eligible for additional borrowing of 0.50 per cent of GSDP linked to reforms in the power sector.
- 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.
- 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.
- 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. All these have led to greater reliance on off-budget borrowings.
Two reasons for the rise in off-budget borrowings
- Over the last two years, many States have resorted to off-budget borrowing to fund their capital expenditures and minimise the impact of a economic downturn induced by Covid19.
- There are two reasons for the rise in off-budget borrowings. 1. constrained revenue growth due to the Covid-19 pandemic induced slowdown and increasing revenue expenditure have led to States’ fiscal deficits rising to 4 per cent of GSDP, well above the historical level of 2-3 per cent seen for most part of the last decade. This has reduced the wherewithal of States to directly fund the entities they own. 2. even if States wanted to do so by borrowing more, they can’t without the explicit approval of, and beyond the limits set by, the central government.
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