Should States Heed the Finance Commission's Warnings on Off-Budget Borrowings?
Synopsis
As states grapple with rising debts, the Finance Commission's recent recommendations call for stringent measures to curb off-budget borrowings. This pivotal guidance aims to ensure fiscal stability and accountability, urging states to align their financial practices with long-term sustainability goals.
Key Takeaways
States must keep fiscal deficits under 3 percent of GSDP.
Off-budget borrowings should be eliminated.
CAG to include off-budget borrowings in finance accounts.
States are encouraged to amend FRBM laws.
Fiscal roadmap targets a combined deficit of 6.5 percent of GDP.
New Delhi, Feb 1 (NationPress) The Finance Commission has advised that the fiscal deficits of states must remain within the 3 percent limit of Gross State Domestic Product (GSDP) during the award period from 2026 to 2031. This recommendation aims to prevent states from resorting to off-budget borrowings to maintain financial stability.
Furthermore, the Commission has proposed that the Comptroller and Auditor General (CAG) should include details about off-budget borrowings in State Finance Accounts.
Highlighting inconsistencies in State-level Fiscal Responsibility Legislations (FRLs), the Commission urges states to revise their FRBM laws in line with the suggested consolidation path. Additionally, it recommends expanding the definitions of deficit and debt to cover off-budget liabilities.
In its report for 2026–31, the Commission emphasizes that the 3 percent borrowing ceiling for states should be strictly enforced under Article 293(3) of the Constitution to ensure debt sustainability.
“States must cease the practice of off-budget borrowings entirely and integrate all such borrowings into their budgets. If off-budget borrowings occur for any reason, a framework for regular annual reporting should be established, ideally as part of the budget,” the 16th Finance Commission states in its report.
The report also clarifies that interest-free on-lending by the Centre to states under the Special Assistance to States for Capital Investment (SASCI) will remain outside this limit, consistent with current practices.
Notably, the report indicates that states have increasingly depended on market borrowings to cover their deficits in recent years. The proportion of state government borrowings relative to total government borrowings has surged from about 33 percent in 2015–16 to 43 percent by 2024–25, as noted in the report.
Consequently, outstanding securities have escalated to 2025–26, compared to just 24 percent in 2015–16. This increase in market borrowings is also attributed to states not utilizing the National Small Savings Fund (NSSF), according to the report.
According to the fiscal roadmap outlined by the Commission, the Union government’s fiscal deficit is projected to reach 3.5 percent of GDP by 2031, while states are expected to maintain a fiscal deficit of 3 percent, leading to a combined fiscal deficit of 6.5 percent of GDP.
Point of View
It is crucial for states to prioritize fiscal discipline. The emphasis on eliminating off-budget borrowings reflects a commitment to transparency and accountability, vital for long-term economic health. Upholding these guidelines could pave the way for more sustainable fiscal policies and strengthen the overall financial framework of our nation.
NationPress
5 May 2026
Frequently Asked Questions
What does the Finance Commission recommend for state fiscal deficits?
The Finance Commission recommends that fiscal deficits of states should remain within the 3 percent limit of Gross State Domestic Product (GSDP) during the 2026-31 period.
Why are off-budget borrowings a concern?
Off-budget borrowings are concerning because they can undermine financial stability and transparency, leading to unaccounted liabilities.
What should states do regarding their borrowing practices?
States should cease off-budget borrowings and include all borrowings in their budgets, ensuring regular reporting.
How has state borrowing changed over recent years?
State borrowing has significantly increased, with the share of state government borrowings rising from 33 percent in 2015-16 to 43 percent by 2024-25.
What is the combined fiscal deficit target for the Union and states?
The combined fiscal deficit target is 6.5 percent of GDP, with the Union government at 3.5 percent and states at 3 percent .
