Throwing light on the role of off-budget borrowings, explain how it helps the government in raising funds for various expenditures. Also examine its desirability.
Off-budget borrowings refer to government borrowings not accounted in budget or fiscal deficit. These are borrowed by government agencies and/or PSUs from market or other innovative sources. E.g. FCI’s borrowings from market.
Role in helping government raise funds:
- Enhance fiscal space of the government, as off-budget borrowings are not accounted in the fiscal deficit.
- It helps to diversify sources of funding. E.g. FCI borrowing from market or bonds, etc.
- It allows the credit ratings to not get affected by the increased borrowings.
- Keep separate, the debt of government from its agencies/PSUs.
However, the desirability of off-budget borrowings has been questioned and criticized, as:
- It Reduces transparency in government’s fiscal policy. E.g. CAG pointed out that the fiscal deficit for the year 2017-18 was approximately 3.5%, but in reality it was close to 6%.
- It violates FRBM’s timelines through manipulative innovation and funding.
- It escapes the parliamentary scrutiny as borrowings under budget are scrutinized by Parliament, while off- budget borrowings are not.
The 15th finance commission recommended the government to do away with off-budget borrowings for increased transparency and accountability. Strengthening bond market could be an alternative to fund needs.