One of the most sought-after details in any Union budget is the level of the budget deficit. It is essentially the gap between what the central government spends and what it earns. In other words, it is the level of the borrowing of the government of the Union.
This number is the most important metric in understanding the financial health of any government’s finances. As such, it is heavily watched by rating agencies – both inside and outside the country. This is why most governments want to limit their budget deficits to a respectable number.
One way to do this is to resort to “off-budget borrowing”. Such borrowing is a way for the Center to finance its expenses while ignoring the debt – so that it is not taken into account in the calculation of the budget deficit.
What are off-budget borrowing?
According to the latest budget documents, during the current fiscal year, the Center was to borrow Rs 5.36 lakh crore. However, this figure does not include the loans that public sector companies were supposed to take on their behalf or the deferred payments of invoices and loans by the Center. These items constitute “off-budget borrowing” because these deferred loans and payments are not part of the budget deficit calculation.
This year was no exception. Each year, the Minister of Finance announces the amount of funds that will be raised by the government by borrowing on the market. This amount and the interest due on it are reflected in the public debt.
Off-budget loans are loans which are not contracted directly by the Center, but by another public institution which borrows on the instructions of the central government. These loans are used to meet the spending needs of the government.
But since the responsibility for the loan does not formally rest with the Center, the loan is not included in the national budget deficit. This keeps the country’s budget deficit within acceptable limits.
As a result, as a 2019 Comptroller and Auditor General report points out, this funding channel puts the main sources of funding out of Parliament’s control. “Such off-budget financing is not part of the calculation of budgetary indicators despite the tax implications,” the report said.
How are off-budget borrowing generated?
The government can ask an executing agency to raise the necessary funds in the market through loans or by issuing bonds. For example, the food subsidy is one of the Centre’s main expenses. In the budget presentation for 2020-2021, the government paid only half of the budgeted amount for the food subsidy bill to the Food Corporation of India. The deficit was made up with a loan from the National Small Savings Fund. This enabled the Center to halve its food subsidy bill from Rs 1.51,000 crore to Rs 77,892 crore in 2020-2021.
Other public sector companies have also borrowed for the government. For example, public sector oil marketing companies have been asked to pay for subsidized gas cylinders for Pradhan Mantri Ujjwala Yojana beneficiaries in the past.
Public sector banks are also used to finance off-budget spending. For example, loans from PSU banks were used to compensate for the shortfall in the release of the fertilizer subsidy.
If these numbers were included, what would the government’s budget deficit look like?
“If we consider the amount borrowed from the NSSF only for this year, the budget deficit will increase from Rs 40,000 to Rs 50,000 crore in absolute terms,” said Professor NR Bhanumurthy, vice-chancellor of the BR Ambedkar School of Economics, Bengaluru.
In addition to the loans of the PSUs, the real commitments of the government would include the loans contracted for the recapitalization of the banks and the capital expenditure of the Ministries of Railways and Energy.
Given the various sources of off-budget borrowing, actual debt is difficult to calculate. For example, it was widely reported that in July 2019, just three days after the budget was presented, the CAG fixed the real budget deficit for 2017-18 at 5.85% of GDP instead of the government version of 3 , 46%.