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

Detail

1. Why financing matters

• Art. 112 requires the government to present an Annual Financial Statement (the Budget) each year. If spending is more than receipts, the gap must be filled.
• Fiscal deficit (FD) means the government's total spending minus its total receipts, not counting borrowings. It shows how much the government must borrow in a year.

• Formula: FD = Total expenditure − (Revenue receipts + Non-debt capital receipts)

• FD 2026-27 (BE): 4.3% of GDP. It was 4.4% in 2025-26 (RE) and 4.8% in 2024-25 (actual) [3].

• Borrowings needed in 2026-27 (BE): ₹16,95,768 crore. This is 8.8% more than the 2025-26 RE [3].
• Primary deficit means FD minus interest payments. It is 0.7% of GDP in 2026-27 (BE) [3].
• Interest burden: interest payments take 40% of revenue receipts and 26% of total spending in 2026-27 (BE). Interest payments are ₹14,03,972 crore [3].

2. The financing identity (NCERT)

• Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
• Net borrowing at home has two parts:
• Directly from the public, through small savings schemes. Examples are PPF, NSC, post-office deposits and Sukanya Samriddhi.

• Indirectly from banks, through the Statutory Liquidity Ratio (SLR). SLR is the share of their deposits that banks must keep in safe assets, mainly G-secs. G-secs (government securities) are bonds the government sells when it borrows.

• Borrowing from abroad: loans from other countries and from bodies such as the World Bank.

• Worked example, 2026-27 (BE) (shares worked out from [3][4]):

Source	₹ crore	Share of FD
Net market loans (dated G-secs)	11,73,210	≈ 69%
Securities against small savings (NSSF)	3,86,772	≈ 23%
Net external debt	15,385	≈ 1%
State Provident Funds	3,500	< 1%
Other items (Treasury Bills, other Public Account receipts, cash balance)	balance	≈ 7%
Total borrowings = FD	16,95,768	100%

• Gross vs net market borrowing, 2026-27 (BE) [4]:
• Gross market borrowing is ₹17,20,000 crore.
• Repayments of old loans are ₹5,46,790 crore.
• So net market loans are ₹11,73,210 crore.

• Lesson: gross borrowing is much larger than net borrowing, because old debt keeps falling due and must be repaid.

• Market borrowing calendar: the government borrows through the sale of dated G-secs. It announces a half-yearly Indicative Market Borrowing Calendar for this [4].

• Treasury Bills: short-term G-secs of 91, 182 and 364 days, sold at weekly auctions. 14-day intermediate T-bills are for states to park short-term cash surpluses [4].

3. Deficit financing and monetisation

• Deficit financing: covering a deficit by borrowing or by creating new money. In Indian usage it usually means borrowing from the RBI, which is money creation.

• Chain: RBI lends to the government → new high-powered money enters the economy → money supply rises → risk of inflation.

• Monetised deficit: the part of the FD that the central bank finances.

• Formula: Monetised deficit = Increase in the RBI's net credit to the government during the year.
• Example: the RBI's net credit to the government rises from ₹10 lakh crore to ₹12 lakh crore → monetised deficit = ₹2 lakh crore.

4. History of RBI financing

1. Ad hoc Treasury Bills gave automatic, unlimited monetisation. When the government ran short of cash, it simply issued them to the RBI, and the RBI had to accept them.
2. 1994: the government and the RBI signed an agreement to phase out ad hoc T-bills.

3. 1 April 1997: ad hoc T-bills ended and Ways and Means Advances (WMA) began. - The old ad hoc T-bills were later converted into marketable securities (in 2003-04) [4].

4. FRBM Act 2003: from 2006-07, the RBI may not subscribe to primary issues of G-secs. A primary issue is the first sale of a new bond by the government.

5. 2018 amendment: direct RBI subscription is allowed when the escape clause is invoked. The escape clause is a provision that lets the government miss its deficit targets in special situations named in the law. This became a live question in the 2020 pandemic.

5. Ways and Means Advances (WMA)

• Definition: short-term advances from the RBI to cover a temporary gap between the government's receipts and payments. They are not meant to fund the deficit itself.
• Limits are fixed by the RBI in consultation with the government, one half-year at a time.

• WMA limit for H1 2026-27 (April–September 2026): ₹2,50,000 crore (announced 27 March 2026) [2].

• Interest cost [2]:

• WMA is charged at the repo rate. The repo rate is the rate at which the RBI lends to banks for a short time.

• Overdraft is charged at repo rate + 2%.

• Overdraft: borrowing beyond the WMA limit. It is costlier, so the government has a reason to stay within the limit.

• 75% trigger: the RBI may trigger fresh market loans once the government has used 75% of the WMA limit [2]. This pushes the government to borrow from the market and not lean on the RBI.
• Under FRBM, WMA is the only allowed form of borrowing from the RBI.

6. Small savings and the NSSF

• Small savings schemes in force [4]:
• Post Office Savings Account
• National Savings Time Deposits (1, 2, 3 and 5 years)
• Recurring Deposits
• Monthly Income Scheme
• Senior Citizens Savings Scheme
• NSC
• PPF
• Kisan Vikas Patra

• Sukanya Samriddhi Account

• National Small Savings Fund (NSSF): a fund in the Public Account. The Public Account holds money the government keeps in trust for others, so it is not the government's own money.

• How the money flows [4]:
• Net collections (deposits minus withdrawals) → NSSF.
• The NSSF invests them in Central and State Government Special Securities. From 2021-22 these have a 10-year term and no moratorium.
• The NSSF also invests in some public agencies.

• When state securities mature, the money is reinvested 50:50 in Centre and state securities. When Centre securities mature, the money is reinvested fully in Centre securities.

• Size: securities against small savings are ₹3,86,772 crore in 2026-27 (BE). They were ₹3,72,192 crore in 2025-26 (RE) and ₹4,29,502 crore in 2024-25 (actual) [4]. That is about 23% of FD in 2026-27 (NCERT scaffold: "share: verify current").

• A costly source: small-savings interest rates are usually higher than market rates. They are set by formula, not by bond auctions.
• Chain: the NSSF pays savers more → the Centre pays more interest to the NSSF → interest burden rises.

7. Hidden deficits

• Off-budget borrowing: borrowing done by public bodies on the government's behalf that does not appear in the FD. It makes the true deficit look smaller than it is.
• Example, FCI: the Food Corporation of India borrowed from the NSSF to cover food subsidy that the government had not paid.

• Budget 2021-22 moved this onto the budget. This is one reason the FD looked higher that year.

• Extra-budgetary resources (EBRs): money raised through PSUs and SPVs to fund budget schemes. An SPV (special purpose vehicle) is a separate company set up for one job. Examples are NHAI and IRFC.

• A disclosure statement has come with the Budget since 2019-20.

• The CAG has criticised EBRs because they hide the true deficit.

• 16th Finance Commission [3]:

• 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.

• The states' FD limit should be 3% of GSDP.

• Contingent liabilities: possible future obligations, mainly government guarantees on PSU and SPV loans.

• They become real debt only if the borrower defaults.
• FRBM caps new guarantees at 0.5% of GDP a year.

• CAG finding: extra guarantees given by the Centre were 0.23% of GDP in 2022-23, which is within the cap. This was in the CAG report on FRBM compliance, presented 21 July 2025 [5].

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

8. The debt anchor

• 2018 FRBM amendment (on the N.K. Singh Committee's advice) [6]:
• Central government debt to be cut to 40% of GDP.

• FD target of 3% of GDP by 2021.

• Current path [3]:

• The Centre's outstanding liabilities are 55.6% of GDP in 2026-27 (BE).
• They peaked at 61% of GDP in 2020-21.

• The new aim is about 50% ± 1% of GDP by March 2031.

• PRS note: the Medium-Term Fiscal Policy Statement has not given rolling deficit targets since 2021-22 [3].

Prelims Hooks

• GFD = Net borrowing at home + Borrowing from RBI + Borrowing from abroad. Banks lend to the government indirectly through SLR.
• Monetised deficit = increase in the RBI's net credit to the government. It is not the same as the whole FD.
• Ad hoc T-bills ended on 1 April 1997 and were replaced by WMA, following the 1994 GoI-RBI agreement.
• WMA interest = repo rate; overdraft = repo + 2%. The RBI may trigger market loans at 75% use of the WMA limit [2].
• WMA limit, H1 2026-27 = ₹2,50,000 crore [2]. The limit is fixed by the RBI in consultation with the government, not by Parliament.
• NSSF sits in the Public Account, not the Consolidated Fund. It invests in Centre and state special securities [4].
• The largest source of FD financing is net market borrowing (≈69% in 2026-27 BE). Small savings come second (≈23%) [3][4].
• The RBI's bar on buying primary issues of G-secs has applied since 2006-07. The 2018 amendment allows it only when the escape clause is invoked.
• Trap: guarantees are contingent liabilities and are not counted in FD. The FRBM cap is 0.5% of GDP a year. The actual figure was 0.23% in 2022-23 [5].
• The 16th FC wants FD and debt definitions to include all off-budget borrowing. It recommends a Centre FD of 3.5% of GDP by 2030-31 [3].

Mains Points

• Monetisation vs market borrowing:
• Borrowing from the RBI is cheap and fast, but it adds to money supply and inflation. It also weakens the RBI's independence.
• Market borrowing avoids that, but it pushes up bond yields. Private firms then find loans costlier (crowding out).

• The ad hoc T-bill → WMA → FRBM path shows India choosing market discipline. The 2018 escape clause keeps an emergency option, as the 2020 debate showed.

• The cost of small savings:

• NSSF money is stable and helps savers with low incomes.
• But its above-market rates raise the interest bill, which is 40% of revenue receipts in 2026-27 [3].

• Its link to off-budget lending (FCI) also hid the true deficit.

• Transparency and credibility:

• Off-budget borrowing, EBRs and guarantees make the headline FD look better than the real position.
• Useful steps: bringing FCI's NSSF loans onto the budget (2021-22), the EBR statement (since 2019-20), CAG scrutiny [5], and the 16th FC's call for a wider FD definition [3].

• Honest accounts build market trust and lower borrowing costs.

• Debt anchor over deficit targets:

• The shift to a debt goal of 50% ± 1% of GDP by March 2031 [3] gives room to change year to year.
• But without rolling FD targets, Parliament finds it harder to hold the government to account each year.
• Good for a GS-III answer on fiscal rules.