On-budget Drivers of Off-budget Debt: An Indian Perspective

This study makes an attempt to unfurl why the off-budget exposure of the government, which poses sizeable fiscal risks as and when they materialize, is an off-shoot of the on-budget constraints that governments either inherit or get involved in. These not only include procedural or rule-driven inefficiencies but also combine asymmetrical nature of growth episodes at both the national and sub-national levels. As a result, much of the off-budget debt burden rises in both its implicit form through the rise in magnitude of the debt–deficit stock-flow reconciliation and explicit form in the form of guarantees extended to distressed public sector bodies. We employ the Nonlinear Autoregressive Distributed Lag Model to account for this relationship between the off-budget and on-budget indicators at both the national and sub-national levels. This carries significant policy implications for a federal nation like India where lack of uniformity in fiscal rules coupled with the responsibility of bailing out state governments lying with the national government entails a clear mandate for fiscal transparency at all level of the government. JEL Codes: E610, E620, E660, E600