Context: 

Recently, Telangana CM said that the State had resorted to off ­Budget borrowings to complete irrigation projects in the shortest time but the Centre had imposed borrowing limits.

About Off ­Budget Borrowing:

• Off Budget borrowings are loans obtained by government entities, such as PSUs or special purpose vehicles, on behalf of the government to finance its expenditure. 
• According to the Comptroller and Auditor General of India, these borrowings are not included while computing the debt and the fiscal deficit of the State governments. This helps keep the country’s fiscal deficit within acceptable limits.
• However, the State government is responsible for repaying the loan and servicing the debt from its Budget. 
• As extra­Budgetary borrowings find no mention in the Budget documents, one has to rely on the CAG reports to ascertain the figures. 
• Five Southern States — Telangana, Andhra Pradesh, Kerala, Tamil Nadu and Karnataka — accounted for around 93% of the total off Budget liabilities of eleven major States analyzed. 

Concerns:

• The CAG’s contention is that resorting to extra­budgetary resources will lead them to a debt trap.
• Fiscal rules related threshold deficit ratios and increasingly volatile intergovernmental transfers have affected the fiscal space of States. Hence,  they resort to OBB for financing.
• In almost all States, if the off Budget loans were added to their declared debt, it can take their debt to GDP ratio even further away from State targets.

How are off-budget borrowings raised?

• The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds. 
  • For example, Food subsidy is one of the major expenditures of the Centre. In the Budget presentation for 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. The shortfall was met through a loan from the National Small Savings Fund. This allowed the Centre to halve its food subsidy bill from Rs 1,51,000 crore to Rs 77,892 crore in 2020-21.
• Other public sector undertakings have also borrowed for the government. For instance, public sector oil marketing companies were asked to pay for subsidized gas cylinders for Pradhan Mantri Ujjwala Yojana beneficiaries in the past.
• Public sector banks are also used to fund off-budget expenses. 
  • For example: Loans from PSU banks were used to make up for the shortfall in the release of fertilizer subsidies.                                                                                                                              

News Source: The Hindu