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Finance Commission Cracks Down on States' Off-Budget Borrowings for 2026-31

The 16th Finance Commission has recommended a strict 3% of GSDP fiscal deficit limit for states for the 2026-31 period. It has called for a complete end to the practice of off-budget borrowings by state governments, urging them to bring all such liabilities onto their official budgets. The Commission has advised that the Comptroller and Auditor General (CAG) include disclosures on these borrowings in State Finance Accounts for greater transparency. It also highlights a significant rise in states' share of total government market borrowings, from 33% in 2015-16 to 43% in 2024-25.

Key Points: Finance Commission Bans States' Off-Budget Borrowings

  • 3% fiscal deficit cap for states
  • Ban on off-budget borrowings
  • CAG to report state off-budget loans
  • Align state FRBM laws with new path
2 min read

Finance Commission red flags off-budget borrowings by states

16th Finance Commission mandates 3% fiscal deficit for states, demands end to off-budget loans and stricter debt reporting to CAG.

"States should completely discontinue the practice of incurring off‑budget borrowings - 16th Finance Commission Report"

New Delhi, Feb 1

The Finance Commission has recommended that the fiscal deficits of states should stay within the 3 per cent of Gross State Domestic Product limit during the award period 2026-27 to 2030-31, and that they should not go in for off-budget borrowings to ensure financial stability.

It also recommended that the Comptroller and Auditor General (CAG) include disclosures on off-budget borrowings in State Finance Accounts.

The commission has highlighted inconsistencies in State-level Fiscal Responsibility Legislations (FRLs) and has urged states to amend their FRBM laws to align with the recommended consolidation path. It has also recommended that the definition of deficit and debt be broadened to include off-budget liabilities.

In its report, for 2026-31, the Commission states that the 3 per cent ceiling on state borrowing should be strictly enforced under Article 293(3) of the Constitution to ensure debt sustainability.

"States should completely discontinue the practice of incurring off‑budget borrowings and bring all such borrowings onto their budgets. If, for any reason, off‑budget borrowings are undertaken, there should be a framework for their regular annual reporting, preferably as part of the budget," the 16th Finance Commission has stated in its report.

It has clarified that interest-free on-lending by the Centre to States under the Special Assistance to States for Capital Investment (SASCI) would continue to be outside this limit, as is the current practice.

The report has highlighted that in recent years, states have increasingly relied on market borrowings to finance their deficits. The share of state government borrowings in total government borrowings has risen significantly since 2015‑16, accounting for about 33 per cent of total government securities issued in 2015‑16, which increased to 43 per cent in 2024‑25, the report points out.

As a result, outstanding securities have shot up to 2025‑26, compared to 24 per cent in 2015‑16. Higher market borrowings by the states also arise from the fact that they do not avail the National Small Savings Fund (NSSF), the report observes.

According to the fiscal roadmap chalked out by the Commission, the Union government's fiscal deficit is targeted at 3.5 per cent of GDP by 2031, while that of the states is fixed at 3 per cent, which works out to a combined fiscal deficit of 6.5 per cent of GDP.

- IANS

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Reader Comments

S
Sarah B
As someone who works in public policy, I appreciate the recommendation to bring the CAG into the picture for disclosures. Accountability is key. However, the 3% limit seems very strict for states that are still developing infrastructure. A one-size-fits-all approach might not work for all states.
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Arjun K
Finally! States have been taking loans through backdoor methods like PSUs and special purpose vehicles to bypass FRBM limits. This distorts the true picture of state finances. The central government must also ensure it doesn't push states into off-budget borrowing by reducing their share of taxes.
P
Priyanka N
Good move for fiscal discipline. But what about the existing off-budget liabilities? Many states are already deep in debt from such practices. The report should have suggested a clear roadmap for how to bring those existing liabilities onto the books and manage them.
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Karthik V
The share of state borrowings going from 33% to 43% is alarming. This needs to be controlled. However, the central government's deficit target is 3.5% while states are at 3%? Seems a bit unfair. The centre should lead by example with stricter limits. 🤔
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Meera T
Transparency is good, but I hope this doesn't slow down development projects in smaller states. They often need to borrow for capital expenditure on roads, schools, and hospitals. The interest-free SASCI loans staying outside the limit is a relief, but more such mechanisms are needed.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

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