Contingent liabilities are emerging as a preferred instrument of fiscal policy. Evaluate with examples.

Contingent liabilities are obligations — chiefly government guarantees under Article 292 — that crystallise into spending only on a trigger such as borrower default. Increasingly, the Union uses them to deliver support without immediate fiscal outgo, exemplified by the Emergency Credit Line Guarantee Scheme (ECLGS) [1].

Why they are preferred

• No upfront outgo: A guarantee needs only a small corpus (ECLGS 1.0 backed Rs 3 lakh crore of credit with a Rs 41,600 crore corpus), preserving FRBM deficit headroom [1].
• Speed and scale: The single-trustee NCGTC platform channelled Rs 3.61 lakh crore to 1.19 crore borrowers by January 2023 [2].
• Flexible, shock-responsive: The same architecture was re-versioned for the Kamath-Committee stressed sectors [4] and, in 2026, ECLGS 5.0 carved out Rs 5,000 crore for airlines hit by ATF and airspace shocks [3].
• Risk-sharing: Leverages bank credit and moral hazard is curbed via partial cover (90% for non-MSMEs) [3].

Concerns

• Hidden fiscal risk: Default converts guarantees into real deficit; large stocks threaten debt sustainability.
• Opacity: Off-budget liabilities dilute legislative scrutiny and understate true fiscal exposure.
• Moral hazard and misallocation: Guarantees may prop up unviable firms and crowd private judgement.

On balance, contingent liabilities are a prudent counter-cyclical tool when time-bound, transparently disclosed and capped. Institutionalising them within a Fiscal Responsibility framework — with ceilings and full budget disclosure — can align this instrument with sustainable, resilient public finance.