A recent report by the Centre for Social and Economic Progress (CSEP) has shed light on a troubling fiscal practice in India states violating mandated debt levels through off budget borrowings. These off-budget manoeuvres, which often go unnoticed, have farreaching consequences for individual states and the country as a whole.

Off-budget borrowings are a financial sleight of hand that allow states to borrow funds without reflecting them in their official budgets. This practice, while seemingly harmless, has serious ramifications. Off-budget borrowers may include Public Sector Undertakings (PSUs), Special Purpose Vehicles (SPVs) and even governments themselves. These entities borrow substantial amounts of money without it being accounted for in the budget,

potentially masking the true extent of a state’s liabilities. In 2021, the five southern states Telangana, Andhra Pradesh, Karnataka, Kerala, and Tamil Nadu together accounted for a whopping Rs. 2.34 lakh crore in debt, approximately 93 per cent of the combined states’ off-budget liabilities. Telangana emerged as the highest borrower with around Rs 97,940.45 crore in off-budget debt, equal to 9.99 per cent of its gross state domestic product (GSDP). Other southern states followed closely behind.

The consequences of such off-budget borrowing are two-fold. First, they can distort a state’s fiscal picture, making it appear more financially stable than it actu- ally is. This can mislead investors, credit rating agenci- es and the public, jeopardising the state’s economic stability. Secondly, when these off-budget liabilities are considered, the debt-to-GSDP ratio increases significantly. For instance, in the case of Andhra Pradesh, the state’s debt to GSDP ratio exceeded the permissible 35 per cent limit for the year 2020-21 when off-budget liabilities were accounted for. Similar scenarios unfolded in other southern states, such as Telangana, Karnataka and Kerala, where off-budget borrowing inflated their total liabilities. The Fiscal Responsibility and Budget Management (FRBM) Act was enacted to ensure fiscal discipline and sustainable debt management. States are mandated to maintain a certain level of fiscal prudence, including limiting their borrowing. However, off-budget borrowings often circumvent these legal constraints, raising ques- tions about the effectiveness of the FRBM Act in curbing excessive borrowing.

The report speculates that states resort to off-budget borrowings due to increasing capital needs. These needs may arise from infrastructure development, public projects, or addressing economic challenges, leading states to seek alternative funding sources out- side their official budgets. The implications of breaching permissible borrowing limits through off-budget tactics are not limited to individual states alone.

They have a ripple effect on the nation’s fiscal health. When states accumulate substantial off-budget liabilities, it places added pressure on the central government, as it may need to step in to assist financially distressed states. This diverts resources and affects the central government’s ability to fund other crucial national projects and initiatives. Addressing this issue requires a collaborative effort between states and the central gover- nment to ensure sustainable debt management and to uphold the principles of the FRBM Act.