Off-Budget Financing

• The Comptroller and Auditor General (CAG) of India has pulled up the government for increased use of off-budget financing for schemes and subsidies in its Compliance of the Fiscal Responsibility and Budget Management Act report for FY17.

WHAT IS OFF-BUDGET FINANCING?

• This refers to expenditure that’s not funded through the budget. For example, the government sets up a special purpose vehicle (SPV) to construct a bridge.

• The SPV will likely borrow money to build the bridge on the strength of a government guarantee.

• If it’s not a toll bridge, the SPV will need government support to meet interest obligations.

• So, even though the borrowing and spending is outside the budget, it has implications for the budget and for all practical reasons should be included in that document.

• Since it’s not, this doesn’t reflect on the fiscal deficit number as well. Governments across the world use this to escape budget controls.

WHY IS OFF-BUDGET FINANCING IMPORTANT? WHAT ARE ITS IMPLICATIONS?

• Off-budget financing by its nature isn’t taken into account when calculating fiscal indicators. But the cost is borne by the budget through some mechanism or the other.

• Such financing tends to hide the actual extent of government spending, borrowings and debt and increase the interest burden.

• In the above example, the borrowing by the SPV should ideally be included in the government’s debt.

• To the extent that this spending is backed by a government guarantee, it entails a fiscal risk.

• Parliamentary control on such spending is also reduced as its remains outside the budget.

OFF-BUDGET FUNDING IN FY17

REVENUE SPENDING:

• Deferred fertilizer arrears/bills through special banking arrangements

• Food subsidy bills/arrears of Food Corp. of India through borrowings

• Accelerated Irrigation Benefit Program through National Bank for Agriculture and Rural Development borrowing

CAPITAL SPENDING

• Indian Railway Finance Corp. borrowing for railway projects

• Power Finance Corp funding of power projects

WHAT HAS CAG SUGGESTED?

• A policy framework for off-budget financing that should include disclosures to parliament about the amount, rationale and objective of such funding.

———————————————

Mains Paper 3: Economy | Mobilization of resources

Prelims level: Fiscal deficit, Off-Budget financing, FRBM Act,

Mains level: Deficit Financing Mechanisms

Share article