The Indian government has scrapped its practice of off-budget borrowings in financial year 2022 (FY22) with the goal of intensifying fiscal transparency. Additionally, plans are underway to fast-track the settlement of all remaining off-budget obligations. The Comptroller and Auditor General (CAG) of India along with the 15th Finance Commission had voiced concerns over the government’s off-budget financing for welfare schemes through public sector undertakings, prompting calls for increased fiscal transparency.
Understanding Off-Budget Liabilities
Off-budget liabilities are essentially debts incurred by government-controlled entities to finance government programs and subsidies outside the standard budget provisions. These entities drum up funds by issuing bonds bearing higher interest rates than government securities (G-secs). However, since these loans are not directly accounted against the government, their presence is omitted from the national fiscal deficit calculation—helping keep the country’s fiscal deficit within acceptable parameters.
As of the end of FY21, the government had amassed off-budget liabilities approximating Rs 6.7 trillion, which included around Rs 49,000 crore allocated to Pradhan Mantri Awas Yojana Rural, Rs 20,164 crore dedicated to various irrigation initiatives, and Rs 12,300 crore set aside for Swachh Bharat Mission Grameen, among other things.
Addressing Off-Budget Liabilities
Efforts: In an attempt to clean up its fiscal books, the government decided to cease its practice of off-budget borrowings via state-run agencies in the FY22 budget. Moreover, it went on to acquire Rs 5 trillion or roughly 75% of its off-budget liabilities from the National Small Saving Fund (NSSF) in the FY21-FY22 period. Nevertheless, eliminating the remaining off-budget liabilities, which amount to close to Rs 1.7 trillion, is proving difficult due to the unwillingness of bondholders to relinquish their high-yield bonds.
Challenges: The main challenge lies in convincing bondholders to forego their lucrative bonds and surrender the residual interest earnings. Investors are concerned that they won’t be able to find other secured and highly rated bonds offering similar attractive coupon rates if they agree to prepayment. Moreover, bondholders typically expect a premium or an elevated interest rate to make up for the loss of anticipated interest earnings in the remaining tenure of the bonds when faced with premature repayments.
Implications of Off-Budget Liabilities
The practice of off-budget liabilities has several implications. For one, it pushed India’s debt-to-GDP ratio to a 15-year high of about 61.6% in FY21. It also stands as an obstacle to the government’s bid to promote financial transparency and accountability. Other drawbacks include diverting funds from priority sectors such as health, education, and infrastructure development to finance other government programs and subsidies. This further leads to an accumulation of non-performing assets in state-run agencies.
