Budget Trivia: What Is Off Budget Financing?

As per a recent ET reports, it is suggested that the government will come up with its report on off budget financing or expenditure and other liabilities to put before the clear picture of its accounts. So, what is off budget financing and why it holds importance?
Off Budget financing as can be understood from the phrase refers to any of the funding that is not approved as per the Budget. This is important as it more accurately provides the fiscal deficit number.

Budget Trivia: What Is Off Budget Financing?

This can be in the form of the government establishing any special purpose vehicle o SPV for any of the task. This SPV then to carry out the task will need to borrow funds that shall have a government of India backing. And so even as the spending is not routed as part of the budget, it has direct or indirect relation with the budget and needs to be mentioned in the document.

And as off budget financing is not included in the budget, as like other global countries, it is not shown in the fiscal deficit data.

What would happen in case off budget financing forms the part of budget?

With its inclusion in arriving at the budget, fiscal deficit of the country will shoot higher than the targeted levels of 3.3% of GDP to 4.5% for FY 20.

In December, the International Monetary Fund (IMF) said that increases in off-budget financing were responsible for debt as a share of GDP not changing much over the past decade even though there had been some improvement in reported fiscal deficits.

Why is off budget financing important?

Though off budget financing is not included in its sense in the budget, its cost is borne in the budget in some way or the other. And this then fails to depict the exact quantum of government's borrowing, spending, debt as well as increase in the government's burden due to interest obligation.

Like as in the case when the SPV borrows funds it should be included in the budget as it carries some amount of fiscal risk.

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