When tabling the budget a week ago, Telangana Finance Minister T. Harish Rao accused the Center of “creating hurdles after hurdles” in the development of the state. He said the state had resorted to off-budget borrowing to complete irrigation projects as soon as possible, but the Center had imposed borrowing limits. This reduction in the borrowing limit, he argued, was contrary to “the spirit of federalism.”
Off-budget borrowings are loans obtained by government entities, such as PSUs or special purpose entities, on behalf of the government to finance its expenditures. According to the Comptroller and Auditor General of India, these borrowings are not included in the calculation of state governments’ debt and budget deficit. However, the state government is responsible for repaying the loan and servicing the debt from its budget.
As extra-budgetary borrowings are not mentioned in the budget documents, one has to rely on CAG reports to verify the figures. Five southern states – Telangana, Andhra Pradesh, Kerala, Tamil Nadu and Karnataka – accounted for ₹2.34 lakh crore, around 93%, of the total off-budget liabilities of the top eleven states analyzed.
In March 2021, Telangana had the highest burden of such loans, followed by Andhra Pradesh. Chart 1 shows off-budget government borrowing by the end of March 2021 in crores of rupees.
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Andhra Pradesh had an off-budget borrowing of ₹86,260 crore. The state Civil Supplies Corporation accounted for 35% of the loan, while Andhra Pradesh Power Finance Corporation’s share was 18%. Chart 2 Breaks down Andhra Pradesh off-budget borrowing by government-owned entities. The assertion of the CAG is that reliance on extrabudgetary resources will lead them into a debt trap.
“Fiscal rules linked to deficit thresholds and increasingly volatile intergovernmental transfers have affected states’ fiscal space. [Hence] they use the OBB for financing [and] …innovating alternative sources of financing… For example, Telangana has resorted to debt maturity restructuring. They have deferred refinancing risks by resorting to long-term securities. Kerala has used KIFFB (legal person) to engage in OBB for infrastructure funding,” Lekha Chakraborty of NIPFP told The Hindu.
In almost all states, if off-budget loans were added to their reported debt, it can push their debt-to-GDP ratio even further away from state goals. Table 3 shows four ratios—debt/PISG excluding off-budget loans, debt/PISG including off-budget loans, off-budget loans/debt, and government target for debt/PISG.
With the exception of Karnataka, the debt-to-GDP ratio was already above the target in all states. If off-budget loans were also taken into account, this further increased the states’ debt-to-GDP ratio.
For example, in Andhra Pradesh, outstanding debt stood at 35.3% of GSDP, which was slightly above the government’s target of 35%. But if off-budget borrowing is included, the government debt-to-GDP ratio rises to 44%. Karnataka already counts off-budget borrowing in its debt calculation, while others do not.
In addition, guarantees granted by States to PSUs and SPVs to raise loans or borrowings from banks are also experiencing an upward trend. According to data from an RBI document that assesses state finances, guarantees issued by states as a share of GSDP have been on an upward trend in all the listed states except West Bengal. Chart 4 shows the guarantees issued by the States as part of the GSDP.
Source: State finance audit reports published by the CAG
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