State Workaround for Debt Triggers Disquiet: Audit and Rating Warnings on Off-Budget Liabilities

Key Highlights & Summary 

• Off-Budget Debt via State Entities: Cash-strapped state governments are increasingly using state-owned corporations and Special Purpose Vehicles (SPVs) to raise off-budget debt, masking total leverage and bypassing annual borrowing caps. 

• Audit Warnings by CAG and Crisil: Recent audit reports by the Comptroller and Auditor General (CAG) in Keralam and Maharashtra, alongside warnings from Crisil Ratings, highlight that bodies like the Kerala Infrastructure Investment Fund Board (KIIFB) raise heavy off-budget borrowings that mask genuine state liabilities. 

• Extent of Off-Budget Exposure: Data indicates significant outstanding off-budget obligations, with Keralam recording ₹39,230.33 crore outstanding and Maharashtra holding ₹28,325 crore in off-budget obligations. 

• Central Inclusion in Net Borrowing Ceiling: Under statutory mandates, the Centre caps a state\'s Net Borrowing Ceiling (NBC) at 3% of Gross State Domestic Product (GSDP), prompting the Union government to count off-budget SPV loans serviced via state revenues within NBC limits. 

• Disguised Fiscal Obligations: State governments routinely service off-budget debt using public funds, creating implicit fiscal guarantees and long-term debt servicing risks while generating an illusion of budgetary fiscal discipline.

 • Legal Friction and Sub-Judice Status: The Centre’s decision to deduct state SPV borrowings from regular borrowing limits has led to legal disputes, including ongoing litigation filed by Keralam against the Centre awaiting Supreme Court adjudication. 

Essential Definitions  

• Off-Budget Borrowings (OBB): Loans raised by stateowned enterprises, public sector undertakings, or special purpose vehicles where the servicing of principal and interest is met directly from the state budget rather than the entity\'s own revenue streams. 

• Net Borrowing Ceiling (NBC): The statutory limit set by the Union Government under constitutional provisions restricting the annual net borrowings of state governments, typically benchmarked to 3% of GSDP. 

• Special Purpose Vehicle (SPV): A legal entity created by a government or corporate body to fulfill narrow, specific objectives, often utilized to fund large capital-intensive infrastructure projects. Legal and Constitutional Framework 

• Article 293(3) & (4), Constitution of India: Empowers the Union Government to attach conditions to fresh borrowings by states if the state has an outstanding loan owed to or guaranteed by the Central Government.

 • Article 151, Constitution of India: Mandates the submission of Comptroller and Auditor General (CAG) audit reports relating to the accounts of states to State Governors for tabling in State Legislatures.

 • State FRBM Acts: State-level Fiscal Responsibility and Budget Management legislations setting statutory targets for revenue deficit reduction and fiscal deficit containment relative to GSDP.

 Conclusion Bypassing constitutional borrowing limits through SPVs and state enterprises compromises fiscal transparency and distorts true debt-to-GSDP ratios. Enforcing strict accounting standards for off-budget liabilities, aligning state borrowing rules, and upholding CAG recommendations are essential to ensure long-term fiscal sustainability across Indian states. 

UPSC Relevance 

• GS Paper XIV (GS Paper II): Constitutional Provisions regarding Federal Finances, CentreState Financial Relations (Article 293), Role of Constitutional Bodies (CAG).

 • GS Paper III: Indian Economy (Fiscal Federalism, Off-Budget Liabilities, FRBM Mandates, Fiscal Deficit Management, State Debt Sustainability). • Key Focus: Article 293 Limitations, Off-Budget Borrowings Impact, Net Borrowing Ceiling Enforcements.