Improving data quality a prerequisite for regulating states' off-budget borrowing

Among good fiscal reporting practices that can fill data gaps, coverage, timeliness, quality and integrity of data are widely accepted ones. Off-budget borrowing is a major data gap that needs to be addressed.

A recent Comptroller and Auditor General (CAG) report on the financial audit of the Union government accounts noted that some of the bookkeeping practices of the government were not in line with transparency and disclosure requirements under its own laws. Among good fiscal reporting practices that can fill data gaps, coverage, timeliness, quality and integrity of data are widely accepted ones. Off-budget borrowing is a major data gap that needs to be addressed. The CAG is reportedly planning to publish fiscal sustainability report cards for each state, which would also include details regarding their off-budget liabilities. These are borrowings by public sector companies, special purpose vehicles and other such instruments where the principal and/or interest is to be serviced out of the government budget. The CAG’s plan comes amidst growing concern over state finances.

Recent assessments suggest that with rising committed expenditure, states should focus on increasing revenues and re-examining spending plans to avoid further fiscal strain. This is without even considering the strain caused by off-budget borrowings that they rely on to fund some of their expenditures. The lack of complete data makes it impossible to understand the full extent of such borrowings. While the Centre has been publishing a statement of extra-budgetary resources in recent budgets, states do not typically release comparable information.

Article 293(3) of the Constitution requires that every state that is indebted to the Centre beyond a specified limit take the latter’s consent before additional borrowing. The Centre can impose a net borrowing ceiling for each state. In March 2022, the Centre decided to include off-budget borrowings made by states as states’ own borrowings. This reduced the additional borrowing capacity of states as the net borrowing ceiling was not changed. It effectively imposed a sudden, hard central limit on total state borrowings, which the states complained constrained their developmental activities.

While the states’ concerns are understandable, even prior to this decision, they were effectively violating the debt limits imposed by their own fiscal rules, and also those imposed by the Centre via Article 293(3). While debt used responsibly can help governments achieve their developmental objectives, excess borrowings can potentially bankrupt a government. Off-budget borrowing essentially defers spending and leaves it to the future, without accounting for it as debt in the present. This puts a part of government debt beyond the scrutiny of markets, lenders and citizens, and allows governments – Centre as well as state – to circumvent statutory and constitutional debt limits.

The fiscal deficit limit for most states is currently fixed at around 3 percent of the GSDP. Most states breach this limit without even accounting for their off-budget borrowings. For instance, Telangana’s gross fiscal deficit ratio stood at 4.1 percent at the end of FY22. The Centre’s recent efforts to bring out the states’ off-budget numbers is a necessary first step. However, it raises questions about the completeness of the move.

In order to enforce its newly expanded definition of state borrowings, the Centre rightly asked states to provide information regarding their off-budget borrowings. Presumably, this means that the Centre now has access to states’ off-budget numbers, but it has not released these numbers in the public domain. Even though some degree of regulation over subnational off-budget borrowings has been achieved, the benefits of full transparency and the wider scrutiny that such a measure would have entailed are not there yet. Therefore, we find certain states like Telangana, Andhra Pradesh, and Kerala attracting all the attention. Whether this is because these states are the highest off-budget borrowers or the ones about which more information is available is difficult to say.

While the Centre’s attempt to regulate sub-national off-budget borrowing has been praised, the effects of disclosure could be conditionally phased. For example, post-pandemic expenditures have impacted the fiscal health of states. In such as situation, fully subsuming off-budget borrowings in the overall state debt, without any temporary and conditional relaxing of the net borrowing ceilings, might force states to cut spending in critical areas.

Without adequate data, it is hard to gauge the full extent of off-budget borrowing. There is a need for wide-ranging public financial management reforms, as we elaborate upon in our working paper ‘An analysis of off-budget borrowings by Indian governments and their legal context’. If such data were to become available, markets could more effectively reward or punish governments at the Centre and states for their borrowing behaviours. Citizens can use this information as well to evaluate government performance and vote accordingly. The ongoing debate on freebies demonstrates popular interest in fiscal affairs.