30 January 2025 : Daily Answer Writing
Q1) What do you understand by ‘off budget borrowings? Discuss its implications on the fiscal health of the government. (150 Words/10 Marks)
Answer:
● Off-budget borrowing refers to loans acquired by government agencies, such as public sector undertakings (PSUs), which are not accounted for in the government’s budget and fiscal deficits. they are obtained under government directives to meet its expenditure requirements.
● Off-budget borrowings are usually raised through – bonds, using savings schemes [e.g. Central government paid FCI through a loan from the National Small Savings Funds], PSU borrowings [e.g. oil-marketing; PSUs bearing the burden of PM Ujjawala Yojana], and PSU banks [e.g. for meeting fertilizer subsidy].
Implications of Off-Budget Borrowings:
1. It violates the spirit of the Fiscal Responsibility and Budget Management (FRBM) Act and the principle of fiscal prudence.
a. undermines constitutional principles inscribed in Article 114 – no money can be withdrawn from Consolidated Fund of India without appropriation by Parliament.
b. undermines the executive’s responsibility towards the legislature;
2. The Finance Commission and CAG have flagged the funding of welfare schemes through off-budget borrowings –
a. E.g., CAG had pegged the actual fiscal deficit for 2017-18 at 5.85% of GDP instead of the government version of 3.46% [CAG Report (2019)];
b. pushed government’s debt-to-GDP ratio to 15-year high in FY21.
3. Increases Revenue Expenditure: (a) loans issued to government agencies are at higher rates of interest which increases the burden of interest payments; (b) since these bonds give higher returns along with the safety of sovereign guarantee, bondholders are reluctant to relinquish their high-yield bonds and forfeit the interest income for the remaining duration.
4. Undermines Development Process: (a) rising revenue expenditure diverts funds from capital-generating priority sectors [health, education, infrastructure]; (b) leads to accumulation of non-performing assets.
5. Economic implications: (a) breaching the FRBM Act limits leads to unsustainable debts, thereby passing the burden onto future generations; (b) it can lead to a downgrading of credit ratings, making debt more expensive and unsustainable; (c) it can lead to excess inflation; (d) PSU banks are also used to fund off-budget expenses thereby hampering their lending capacities [crowding-out effect].
Recent Government Efforts to Eliminate Off-Budget Borrowings:
1. In FY22, the Central government announced it would be ending the practice of off-budget borrowing through agencies + state off-budget borrowings would count towards their regular borrowing limits.
2. The Central government also took over 75% off-budget liabilities of the National Small Savings Fund.
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