The most significant concern is the increasing reliance on off-Budget borrowing by states, according to reports from Business Standard. These are loans raised by state-owned enterprises, special purpose vehicles, and other government-controlled entities, with debt servicing ultimately borne by the state through grants, guarantees or dedicated revenue streams. Such borrowing is often used to finance infrastructure, subsidies or loss-making public utilities without immediately reflecting the liabilities on the government's own books, weakening the credibility of headline fiscal indicators. The World Bank's "Debt Transparency in Developing Countries" report underscores the importance of publishing comprehensive and regular debt information, noting that transparent countries can enjoy lower borrowing costs than less transparent peers.
The World Bank, in a recent report prepared for the Sixteenth Finance Commission, found that four states, namely Andhra Pradesh, Telangana, Kerala and Tamil Nadu, relied heavily on off-Budget borrowing between 2021 and 2023, amounting to 0.6-4 per cent of their gross state domestic product, as reported by Business Standard. The real issue here is the absence of transparent and uniform disclosure by state governments, with successive Finance Commissions and the Reserve Bank of India (RBI) repeatedly flagging this concern. The IMF's 2023 Fiscal Monitor notes that more than half of Africa's low-income countries are either in debt distress or at high risk of it, up from 22% a decade ago, highlighting the broader challenge of fiscal transparency across developing economies.
The CAG's findings also expose weaknesses in expenditure classification, according to Business Standard reports. Several states booked routine revenue expenditure as capital outlay, thereby lowering the reported revenue deficit while inflating capital expenditure. Misclassification not only distorts fiscal indicators but also creates a misleading impression of the quality of public expenditure. Equally troubling is the continued use of the residual accounting category 'Minor Head 800 – Other Expenditure', as noted by the World Bank report. The IMF's diagnostic on Senegal found that a fragmented debt-management architecture, in which multiple agencies could borrow without central oversight, contributed to the hidden-debt problem.
The RBI has argued that fiscal-responsibility laws should evolve from merely monitoring deficit numbers to assessing broader fiscal risks, as reported by Business Standard. It recommends a risk-based fiscal framework under which governments regularly disclose off-Budget borrowing, guarantees, contingent liabilities and pension obligations through comprehensive fiscal risk statements. The CAG similarly observed large amounts were booked under the 'Minor Head 800' category, making it difficult for legislatures, investors and citizens to understand where public money was being spent. The African Development Bank's $35 million technical assistance grant is intended to strengthen fiscal-management infrastructure, including a unified debt-management office with legal authority over sovereign borrowing.
Although common government-accounting rules already exist, disclosure practices remain uneven and often inadequate, according to Business Standard. A standardised fiscal reporting framework should require every state to uniformly disclose off-Budget borrowings, guarantees, contingent liabilities, escrowed revenues, unpaid statutory obligations and pension liabilities, alongside the Budget. As the RBI has argued, states should also adopt a medium-term expenditure framework to better link policymaking with budgeting through multiyear expenditure planning, while regularly publishing fiscal-risk statements. The World Bank's approach of "spending better" rather than simply "spending less" advocates measures such as zero-based budgeting and stronger public investment management to evaluate projects before funding is committed. The African Development Bank's $2.8 trillion estimate for climate financing by 2030 under the Paris Agreement highlights the need for innovative financing instruments like debt-for-climate swaps, though critics argue these remain limited compared to Africa's overall debt stock.
