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 counted in the calculation of the fiscal deficit.
The off-budget borrowings are loans that government does not take directly, but public institutions borrow after the Centre's order. These borrowings are intended to fulfill the government's expenditure needs.
Since the Centre is not directly borrowing the money, therefore, the liability of the loan is not formally on the Centre. As a result, it is not included in the fiscal deficit book. Governments across the world use this to escape budget controls.
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In India, the off-budget 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. FRBM Act sets a target for the Centre to establish fiscal discipline, strengthen fiscal prudence, and reduce its fiscal deficits.
The Comptroller and Auditor General of India (CAG), which is empowered to audit all receipts and expenditure of both Centre and state, has warned the union government about extra borrowing several times. The CAG's report on the FRBM compliance for 2016-17 - Report No. 2 of 2018 tabled on January 8, 2019, stated that the Central government has "increasingly resorted to off-budget financing" for revenue spending. The CAG's report also found that the central government was using off-budget borrowings as "a prominent method of financing capital expenditure" and added that there is a likelihood of borrowed funds being deployed "in areas that do not generate enough returns to cover future debt servicing needs".
How Centre raises off-budget borrowings?
The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds.
For example, 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. As of December 31, 2018, 68.25 per cent of beneficiaries have availed loans from OMCs, according to the CAG report of 2019.
OMCs' claims against the release of LPG connections under PMUY are required to be lodge with Petroleum Planning & Analysis Cell (PPAC) on monthly basis. PPAC scrutinises and forwards the same to the Ministry of Petroleum and Natural Gas which in turn reimburses the claims to OMCs.
Although CAG has not straightforwardly called this off-budget financing, these loans can be counted under off-budget borrowing as OMCs are providing loans, and the government here is not directly involved in disbursing loans to the beneficiaries.
The CAG also detected two such off-budget borrowings to fund capital investments in FY17: (i) Indian Railway Finance Corporation (IRFC) and (ii) Power Finance Corporation (PFC).