States are using a roundabout way to borrow. And that's raising concerns
State governments have been using special purpose vehicles (SPVs) and state-owned corporations to raise borrowings outside the regular state budget.
Such borrowings create the appearance of fiscal prudence in headline budget numbers while leaving the state government liable for servicing the interest and principal.
This practice — known as off-budget borrowing — allows states to fund projects without the borrowing showing up directly against their fiscal deficit or debt figures in the budget documents.
Concerns have been raised about the transparency of state finances as a result of this borrowing route.
Off-Budget Borrowing — Definition and Mechanism
Off-budget borrowing refers to loans raised not directly by the government but by a state public sector undertaking (PSU), corporation, or a specially created special purpose vehicle (SPV), where the principal and/or interest is ultimately serviced from the state's own budget rather than from independent revenues generated by the borrowing entity. Because the loan is technically taken by the PSU/SPV and not the state government, it does not appear as government debt in headline fiscal deficit calculations, even though the fiscal liability effectively rests with the state.
Key Details
- The borrowing entity is typically a state corporation, board, or SPV set up for a specific purpose (irrigation, power, infrastructure).
- Debt servicing (interest and principal repayment) is routed through state budgetary support or guarantees, making it a contingent or effective liability of the state.
- The Comptroller and Auditor General (CAG) and the Finance Commission have both flagged off-budget borrowing as undermining fiscal transparency, since it is not subject to the same legislative scrutiny as direct budgetary borrowing.
The practice described in the news — states borrowing via SPVs and corporations — is a textbook case of off-budget borrowing, which understates the true fiscal position of a state even as debt-servicing obligations accumulate.
FRBM Act, 2003 and the Net Borrowing Ceiling
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 is the Centre's framework law for fiscal discipline, mandating deficit and debt targets and requiring transparency in fiscal operations. States are required to enact their own state-level FRBM legislation, and their annual borrowing is capped through a Net Borrowing Ceiling (NBC) fixed by the Centre.
Key Details
- The FRBM Act, 2003 originally targeted a fiscal deficit of 3% of GDP for the Centre, with corresponding targets prescribed for states under their respective state FRBM laws.
- In March 2022, the Ministry of Finance directed that off-budget borrowings by state PSUs, SPVs, and equivalent instruments — where principal or interest is serviced through the state budget — would thereafter be treated as borrowing by the state itself for the purpose of the Net Borrowing Ceiling.
- Adjustment for pre-2022 off-budget borrowing already incurred by states was to be spread over up to four years (2022-23 to 2025-26), which tightened market borrowing headroom for several states.
- The N.K. Singh Committee (2017) had earlier reviewed the FRBM framework and recommended a debt-to-GDP anchor (60% general government, with 40% for the Centre and 20% for states) in place of a rigid annual deficit target.
The 2022 Finance Ministry directive was specifically designed to close the off-budget borrowing loophole the news article describes; continued reliance on SPV borrowing shows the practice persists despite this tightening.
Article 293 of the Constitution — Centre's Control Over State Borrowing
Article 293 of the Constitution governs the borrowing powers of state governments and is the constitutional hook for the Centre's oversight of state debt, including off-budget borrowing.
Key Details
- Article 293(1) allows a state to borrow within India upon the security of its Consolidated Fund, within limits fixed by its own legislature.
- Article 293(3) requires a state to obtain the Union government's consent to raise any further loan if the state has an outstanding loan from the Centre, or if the Centre has guaranteed an outstanding loan of the state — which effectively covers most Indian states given ongoing central loans/guarantees.
- The Centre's March 2022 decision to count off-budget SPV borrowing within a state's Net Borrowing Ceiling was implemented precisely through the Article 293(3) consent mechanism.
The Centre's leverage to curb SPV-route borrowing rests on this constitutional consent power; disputes over its application (e.g., cash-flow strain in some states after the 2022 directive) reflect ongoing Centre-state friction over fiscal federalism.
CAG and Finance Commission Oversight of State Fiscal Transparency
Independent constitutional and statutory bodies play a role in flagging off-budget borrowing as a data and transparency gap in India's fiscal reporting architecture.
Key Details
- The Comptroller and Auditor General of India (CAG), under Articles 148-151, audits state government accounts and has repeatedly flagged off-budget liabilities as understating true state debt.
- Successive Finance Commissions (including the 15th Finance Commission) have recommended fuller disclosure of contingent and off-budget liabilities in state budget documents.
The transparency concerns raised in the article echo long-standing CAG and Finance Commission observations that off-budget SPV borrowing masks a state's real debt burden from legislative and public scrutiny.
- FRBM Act enacted: 2003; original Centre fiscal deficit target: 3% of GDP.
- Off-budget borrowing brought within states' Net Borrowing Ceiling via Finance Ministry directive: March 2022.
- Adjustment period for past off-budget borrowings: spread over four years, FY 2022-23 to FY 2025-26.
- N.K. Singh FRBM Review Committee (2017): recommended a 60% general government debt-to-GDP anchor (40% Centre, 20% states).
- Constitutional basis for Centre's control over state borrowing: Article 293, particularly clause (3) on consent where central loans/guarantees are outstanding.