Off-budget borrowing

Also called: Extra-budgetary resources, EBR · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT

Meaning

Off-budget borrowing is a loan taken by a public body, such as a PSU (public sector undertaking), an SPV (special purpose vehicle) or an agency like the FCI, on the government's behalf. The government will in effect repay or service it, but it is not counted in the fiscal deficit (FD) or in the government's own debt figures.

• Why it matters: the headline FD looks smaller than the real position. The government is spending borrowed money, but that borrowing sits outside the budget.
• Formula link: FD = Total expenditure − (Revenue receipts + Non-debt capital receipts). Off-budget borrowing funds spending that never enters "Total expenditure", so it never shows up in FD.
• Extra-budgetary resources (EBRs) are one form of it. EBRs are money raised through PSUs and SPVs to pay for schemes announced in the budget.

Explanation

How it works

• Normal (on-budget) route:

• The government spends → the spending is shown in the budget → any gap is covered by borrowing → the borrowing is counted in the FD.

• Off-budget route:

• The government wants a scheme done or a bill paid → it asks a PSU, SPV or agency to borrow the money → the loan is on that body's books, not in the budget → the FD looks lower.

• Who really pays: the public body often has no income of its own large enough to repay the loan. The burden comes back to the government later as subsidy, grants or interest support. So it is really government borrowing in disguise.

Main forms

• Unpaid bills covered by loans (FCI case):
• The government did not pay the full food subsidy it owed the Food Corporation of India.
• FCI borrowed from the National Small Savings Fund (NSSF) to fill the gap. The NSSF is a fund that collects money from small savings schemes such as PPF and NSC.

• The food subsidy shown in the budget looked smaller, so the FD looked smaller too.

• Extra-budgetary resources (EBRs):

• PSUs and SPVs raise money to fund budget schemes. An SPV is a separate company set up for one job.

• Examples: NHAI (roads) and IRFC (railways).

• Linked item, government guarantees:

• The government promises to repay a PSU's or SPV's loan if that body cannot.
• These are contingent liabilities (debts that become real only if the borrower defaults). They are not borrowing yet, but they carry the same risk of hidden debt.

Worked example (hypothetical numbers)

Item	Honest budget	With off-budget borrowing
Total expenditure (incl. ₹10 food subsidy)	₹100	₹90 (₹10 subsidy left unpaid)
Revenue + non-debt capital receipts	₹60	₹60
Fiscal deficit shown	₹40	₹30
FCI's loan from NSSF to cover the unpaid subsidy	—	₹10 (off the books)
True deficit	₹40	₹30 + ₹10 = ₹40

• Lesson: total borrowing is the same. Only the reported FD falls, by the amount borrowed off-budget.

What makes it rise or fall

• Rises when: FD targets are tight and the government wants to meet them on paper while spending stays the same.
• Falls when:
• off-budget loans are moved onto the budget
• disclosure rules get stronger
• the definitions of FD and debt are widened to include it
• audit bodies such as the CAG keep a close watch

In India

• Legal and constitutional setting:
• Art. 112: the government must present an Annual Financial Statement (the Budget) each year. Off-budget borrowing sits outside it.

• FRBM Act 2003: sets the deficit and debt targets that create the temptation to shift borrowing off the books.

• FCI clean-up: Budget 2021-22 moved FCI's NSSF loans onto the budget. This is one reason the FD looked higher that year.

• Disclosure: since 2019-20, the Budget includes a statement on EBRs.
• CAG: has criticised EBRs because they hide the true deficit.

• Its report on FRBM compliance (presented 21 July 2025) found that extra guarantees given by the Centre were 0.23% of GDP in 2022-23. That is within the FRBM cap of 0.5% of GDP a year [3].

• 16th Finance Commission [1]:

• Off-budget borrowing by states should strictly stop, and all such borrowing should come onto their budgets.
• The definitions of FD and debt should be widened to include all off-budget borrowing in the same way.

• The Centre's FD should fall to 3.5% of GDP by 2030-31, and the states' FD limit should be 3% of GSDP.

• Why it matters now:

• The Centre's FD is 4.3% of GDP in 2026-27 (BE) [1].
• Outstanding liabilities are 55.6% of GDP in 2026-27 (BE), against a goal of about 50% ± 1% by March 2031 [1].

• Hidden borrowing would make both these numbers less reliable.

• State-level off-budget borrowing is covered in fiscal federalism.

Don't confuse with

• NSSF financing of the FD: the Centre's borrowing from the NSSF through securities against small savings (₹3,86,772 crore in 2026-27 BE [2]) is on-budget and counted in the FD. FCI's loans from the NSSF were off-budget. The source was the same, but the accounting was different.
• Contingent liabilities (guarantees): these are only a promise to pay if a borrower defaults, capped at 0.5% of GDP a year under FRBM. Off-budget borrowing is money already borrowed and spent for the government's purposes.
• Monetised deficit: this is the part of the FD funded by the RBI (the increase in the RBI's net credit to the government). It is inside the FD. Off-budget borrowing is outside the FD altogether.
• Fiscal deficit: the reported borrowing need. Fiscal deficit plus off-budget borrowing gives a truer picture of what the government really borrows.

Prelims Hooks

• Off-budget borrowing and EBRs are not counted in the fiscal deficit, so the headline FD looks smaller than the true deficit.
• NHAI and IRFC are standard examples of bodies that raise EBRs. A disclosure statement on EBRs has come with the Budget since 2019-20.
• FCI borrowed from the NSSF to cover unpaid food subsidy. Budget 2021-22 moved this onto the budget, which pushed up the reported FD that year.
• Trap: the NSSF sits in the Public Account, not the Consolidated Fund. Its lending to the Centre through special securities is on-budget. Its lending to FCI was off-budget.
• Trap: guarantees are contingent liabilities, not off-budget borrowing. The FRBM cap is 0.5% of GDP a year, and the actual figure was 0.23% in 2022-23 [3].
• The 16th FC wants FD and debt definitions widened to include all off-budget borrowing, and wants states' off-budget borrowing to strictly stop [1].

Mains Points

• Transparency and credibility:
• Off-budget borrowing meets FRBM targets on paper but not in reality. The debt still has to be repaid later.
• Markets and rating agencies see through it, so it can raise borrowing costs anyway.

• Useful steps: bringing FCI's NSSF loans onto the budget (2021-22), the EBR statement (since 2019-20), CAG scrutiny [3], and the 16th FC's call for a wider FD definition [1]. Honest accounts build trust and lower interest costs.

• Growth versus fiscal discipline:

• EBRs through NHAI or IRFC let the government build roads and railways quickly without breaking deficit targets.

• But the interest bill comes back to the budget. Interest payments already take 40% of revenue receipts in 2026-27 (BE) [1], so hidden debt reduces the room for future spending.

• Accountability to Parliament:

• Under Art. 112, Parliament approves what is in the Budget. Borrowing outside it escapes that vote and that scrutiny.
• Moving from deficit targets to a debt anchor (50% ± 1% of GDP by March 2031 [1]) works only if "debt" includes off-budget liabilities. This is a strong point for a GS-III answer on fiscal rules and a GS-II answer on parliamentary control of finance.

Related concepts

• Deficit financing
• Small savings schemes
• Ways and means advances
• Monetised deficit
• Contingent liabilities

Read more

• Financing deficits: borrowing, RBI, small savings and hidden liabilities