What is extra budgetary borrowing?

Economy and Finance

What is extra budgetary borrowing?

11 Jul 2023 Zinkpot 174

Off-budget financing, also known as ‘extra’ budget borrowing', is used by the Centre to finance its expenditures while keeping the debt off from its annual statement. Such borrowings are not accounted in the calculation of the fiscal deficit.
This helps keep the country’s fiscal deficit within acceptable limits.
These loans are not directly taken by the government, but by another public institution which borrows at the supervision of the Central government.
In India, this type of financing is also excluded from the Fiscal Responsibility and Budget Management (FRBM) Act, which intends to bring transparency and accountability to the monetary actions of the government.
Significance: Off-budget borrowings are a way for the Centre to finance its expenditure while keeping their debt off the books, so that it is not counted in the calculation of fiscal deficit, which is keenly watched by rating agencies both inside and outside the country.
Fiscal deficit is essentially the gap between what the central government spends and what it earns. It is the most important metric to understand the financial health of any government’s finances. That is why most governments want to restrict their fiscal deficit to a respectable number.
For example, in the Budget 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. This shortfall was met through a loan from the National Small Savings Fund. This led to halving on the food subsidy of the Union Government.
In order to raise the funds under off-budget borrowing, the government can ask an implementing agency to raise the required funds from the market through loans, or by issuing bonds.
To illustrate, oil marketing companies like IOCL, HPCL and BPCL extended unsecured and interest-free loans to Pradhan Mantri Ujjwala Yojana beneficiaries on account of first refill or cost of gas of stove.
India’s Union Budget for 2023-24 contains no off budget borrowing by the Central Government.