Context: One of the most sought after details in any Union Budget is the level of fiscal deficit.

• It is essentially the gap between what the central government spends and what it earns.
• In other words, it is the level of borrowings by the Union government.
• This number is the most important metric to understand the financial health of any government’s finances.
• As such, it is keenly watched by rating agencies — both inside and outside the country.
• That is why most governments want to restrict their fiscal deficit to a respectable number.
• One of the ways to do this is by resorting to “off-budget borrowings”.
• Such borrowings are a way for the Centre to finance its expenditures while keeping the debt off the books — so that it is not counted in the calculation of fiscal deficit.

What are off-budget borrowings?

• Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution which borrows on the directions of the central government.
• Such borrowings are used to fulfil the government’s expenditure needs.
• But since the liability of the loan is not formally on the Centre, the loan is not included in the national fiscal deficit.
• This helps keep the country’s fiscal deficit within acceptable limits.

Comptroller and Auditor General report of 2019 points out, this route of financing puts major sources of funds outside the control of Parliament. Such off-budget financing is not part of the calculation of the fiscal indicators despite fiscal implications.

How are off-budget borrowings raised?

• The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds.
• For example, food subsidy is one of the major expenditures of the Centre. In the Budget presentation for 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India.
• The shortfall was met through a loan from the National Small Savings Fund.
• This allowed the Centre to halve its food subsidy bill from Rs 1,51,000 crore to Rs 77,892 crore in 2020-21.
• Other public sector undertakings have also borrowed for the government. For instance, public sector oil marketing companies were asked to pay for subsidised gas cylinders for Pradhan Mantri Ujjwala Yojana beneficiaries in the past.
• Public sector banks are also used to fund off-budget expenses. For example, loans from PSU banks were used to make up for the shortfall in the release of fertiliser subsidy.

https://indianexpress.com/article/explained/why-govt-borrows-off-budget-and-how-7162925/

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