Many states have already started the clean-up, helping reduce the consolidated off-budget borrowings of the states to ₹18,500 crore in FY23 from ₹67,000 crore in FY22.
The Centre cleaned up its own budget last year when it paid off all the off-budget borrowings by repaying loans such as those taken by the Food Corporation of India.
“The off-the-budget borrowings have come down considerably after strict scrutiny last year,” a senior official told ET. “So (states) are being given one more year to adjust their off-the-budget borrowings.”
Off-budget borrowings refer to loans taken by state-run entities where the principal and interest are serviced out of the state’s budget.
The Centre had in FY22 issued guidelines saying such borrowings will be considered as part of the overall borrowings of a state to discourage off-budget funding.
States are allowed to borrow up to 3.5% of their respective state GDP and an additional 0.5% if they implement mandated power sector reforms.
Following protests from the states, the Centre allowed four years till March 2026 to adjust their accumulated off-budget borrowings. This is now being extended by one more year.
The relaxation will give more headroom for the states to tap the market as their borrowings for the current fiscal year (FY24) is expected to go up by 28% to ₹6.7 lakh crore.
The off-budget debt was subjected to strict oversight after the Centre noticed many states were taking loans through their institutions, which was resulting in an incorrect assessment of their finances.
This resulted in reduced borrowings by many states including Telangana, Kerala, Uttar Pradesh and Tamil Nadu, among others.
The official said the purpose of the restriction was to ensure transparent practices by the states and once the states have declared such borrowings and owned such practices and liabilities, an additional year will be given for adjusting these borrowings in their budget.
According to ratings agency ICRA, Telangana’s share in such borrowings was highest at ₹35,300 crore, followed by Kerala at ₹14,300 crore.
The net borrowings through state government securities (SGS) in the last fiscal was ₹5.2 lakh crore.
The Reserve Bank of India (RBI) has already pegged their gross issuance at ₹2 lakh crore for the first quarter of FY24.
In the Union Budget for FY24, the Centre increased the allocation for the interest-free capital expenditure loans to states to ₹1.3 lakh crore from ₹76,000 crore in the revised estimates. The enhanced amount will be over and above the normal borrowing limit.