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Why government borrows off-budget, and how?

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    1st Feb, 2021

Context

In order to restrict the fiscal deficit to a respectable number, “off-budget borrowing” is the easiest resort for the government.

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

How are off-budget borrowings raised?

  • Implementing agencies: 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 PSUs: 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.
    • PSBs: 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.

Fiscal Deficit

  • It is essentially the gap between what the central government spends and what it earns.
  • 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.

How it is significant?

  • This helps keep the country’s fiscal deficit within acceptable limits.
  • Every year, the Finance Minister announces the quantum of funds that will be raised by the government by borrowing from the market.
  • This amount and the interest due on it is reflected in the government debt.

If these numbers were included, what would the government fiscal deficit look like?

  • The fiscal deficit will go up by Rs 40,000 to Rs 50,000 crore in absolute terms.