Centre relaxes norms for adjusting states' off-budget borrowings

Such borrowings bypass the net borrowing ceiling fixed for states in a fiscal year by routing loans outside state budget through government owned companies or statutory bodies. Since the responsibility for repayment lies with states, it adversely impacts their revenue and fiscal deficit .

With many states facing difficulties due to the borrowing restriction in current fiscal year because of the magnitude of such loans, the finance ministry has relaxed the norms and said off-budget borrowing done by states up to 2020-21 may not be adjusted and only those done in 2021-22 can be adjusted over up to 4 years till March 2026.

Considering the magnitude of the off-budget borrowing of some states and difficulties expressed by states, it has been decided that off-budget borrowing done by states up to the year 2020-21 may not be adjusted. Further adjustment on account of off-budget borrowing done by states in 2021-22 is to be done over up to four years (2022-23 to 2025-26), the Department of Expenditure under the finance ministry said.

As per norms, state governments are required to take the Centre’s approval for fresh borrowing over the limit set for a particular financial year. Over the last two years, many states have resorted to off-budget borrowing to fund their capital expenditures and minimise the impact of a economic downturn induced by COVID-19.

India Ratings & Research Chief Economist DK Pant said adjustment of off-budget borrowing of FY21 and FY22 would have resulted in severe resource crunch for few states. Decision of deferring adjustment of off-balance sheet borrowing of the state where debt servicing is being done through state budget is a good decision.

This will help states to focus on their development agenda. Global experience suggests at difficult times, axe of fiscal consolidation falls on capex and social sector,” Pant added. ICRA Chief Economist Aditi Nayar said the modification regarding off-budget borrowings is likely to provide substantial relief to some states and allow them additional borrowing space in current fiscal year.

As per a study by Crisil Ratings, off-balance sheet borrowings by states are estimated to have reached a decadal high of 4.5 per cent of gross domestic product (GDP), or about Rs 7.9 lakh crore, in 2021-22. This marks a rise of about 100 basis points from 2019-20, reveals a Crisil study of 11 states that account for about 75 per cent of the aggregate Gross State Domestic Product (GSDP) of the country.

There are two reasons for the rise in off-budget borrowings. One, constrained revenue growth due to the pandemic-induced slowdown and increasing revenue expenditure have led to states’ fiscal deficits rising to 4 per cent of GSDP, well above the historical level of 2-3 per cent seen for most part of the last decade. This has reduced the wherewithal of states to directly fund the entities they own.

Two, even if states wanted to do so by borrowing more, they can’t without the explicit approval of, and beyond the limits set by, the central government. But states don’t need prior central consent to guarantee the loans and advances, and bonds issued by its entities. Also, the ceiling on guarantees is self-determined and varies from state to state.

All these have led to greater reliance on off-budget borrowings, Crisil had said in a report in May. But states don’t need prior central consent to guarantee the loans and advances, and bonds issued by its entities. Also, the ceiling on guarantees is self-determined and varies from state to state.

The Centre has fixed the net borrowing ceiling of states at Rs 8,57,849 crore or 3.5 per cent of GSDP. States are also eligible for additional borrowing of 0.50 per cent of GSDP linked to reforms in the power sector.