Karnataka model on PSU borrowings offers template for states: World Bank

Karnataka's move to include PSU and SPV debt in state liabilities offers a template to curb off-budget borrowings and improve fiscal transparency, a World Bank report says

The Karnataka government’s decision in 2014 to include the borrowing of state public-sector undertakings (PSUs) and special-purpose vehicles in its own liabilities can offer a template for replication by other states, a World Bank report for the 16th Finance Commission has said.

 

This is for improving fiscal reporting and strengthening budgetary control.

 

The state had amended the Karnataka Fiscal Responsibility Legislation Act in February 2014 to broaden the definition of liabilities.

 

 State governments in India continue to depend heavily on off-Budget borrowing (OBB) to fund subsidies, infrastructure, and loss-making public utilities, masking the extent of their fiscal stress and creating sizable hidden liabilities, the World Bank has found.

   

“While the Union Government took corrective steps by bringing 93 per cent of its off-budget liabilities (approximately ₹3.7 trillion) onto its balance sheet by FY2022, similar initiatives have been sporadic and largely absent at the state level,” the study added.

 

Analysing 12 states, mainly on the basis of their high ratio of subsidy to expenditure, the World Bank found sharp discrepancies in the reporting of off-Budget borrowing.

 

“Some states like Tamil Nadu and West Bengal have underreported their OBBs, while others have overreported compared to figures reported by the Comptroller and Auditor General of India (CAG). These discrepancies indicate a lack of objectivity and credibility in the reporting process,” the report noted.

 

For 2021-22, a comparison of the figures provided by states with those reported by the CAG shows large gaps: Tamil Nadu reported off-Budget borrowing of just ₹594 crore against the CAG’s estimate of ₹12,357 crore, while West Bengal disclosed ₹1,089 crore versus ₹4,311 crore from the audit for an earlier year. In several states, there was no audited number. 

 

The report has recommended a consolidated “Public Sector Accounting System” to enhance transparency and accountability in state finances and off-Budget borrowing. “Over time, OBBs have evolved into a quasi-permanent source of funding for states, circumventing budgetary discipline. There is an urgent need to establish a coherent, fiscally sustainable, and transparent framework that comprehensively captures state finances, including all off-budget activities,” according to the report. 

 

Opaque accounting practices add another layer of risk. Several states route large sums through the “Minor Head 800 – Others” under both revenue and capital expenditure, obscuring the nature of these transactions.

 

In 2022-23, spending booked under this head accounted for over 15 per cent of expenditure in Madhya Pradesh, nearly 15 per cent in Tamil Nadu, and close to 12 per cent in Andhra Pradesh. 

 

On financing, public-sector banks (PSBs) and government-owned institutions are identified as the main lenders behind state-level off-Budget borrowing.

 

The parliamentary data cited in the paper shows borrowing by state governments and their entities from PSBs in the range of ₹3.1 trillion-4.9 trillion annually between 2018-19 and 2022-23, with institutions such as the National Bank for Agriculture and Rural Development, Housing and Urban Development Corporation, REC, and Power Finance Corporation also giving significant loans to state-owned corporations. 

 

“Lending institutions should also be required to disclose, in a separate statement, the details of all state entities to which they have lent funds based on state government guarantees,” it recommended.

 

It suggested India aim at public-sector consolidation to improve transparency and fiscal discipline despite the challenges posed by complex federal structures.

 

The report proposes a standardised reporting framework for off-budget borrowing, to be enforced by the CAG under Article 150 of the Constitution,  requiring states to report all guarantees, grants, and loans to state-owned entities, revenues collected but kept outside the Consolidated Fund of India, and revenue forgone through waivers.

 

The 16th Finance Commission has recommended that states discontinue off-Budget borrowing and bring all such liabilities on their Budgets.