How do contingent liabilities and off-budget borrowings pose hidden fiscal risks? Why must they be incorporated into fiscal sustainability assessments? Recommend tools to transparently measure such liabilities.
Kartavya Desk Staff
Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Q5. How do contingent liabilities and off-budget borrowings pose hidden fiscal risks? Why must they be incorporated into fiscal sustainability assessments? Recommend tools to transparently measure such liabilities. (15 M)
Difficulty Level: Medium
Reference: NIE
Why the question The question is relevant due to the recent scrutiny of NITI Aayog’s Fiscal Health Index (2025) which ignored off-budget borrowings and contingent liabilities, raising concerns over transparency in state finances. Key demand of the question The answer must examine how off-budget and contingent liabilities pose hidden fiscal risks, explain why they should be integrated into sustainability assessments, and recommend tools for their transparent measurement. Structure of the Answer: Introduction Introduce how India’s official debt understates real fiscal stress due to off-budget borrowings and contingent liabilities. Body Explain how these hidden liabilities create fiscal risks by deferring deficits, increasing inefficiencies, and threatening inter-generational equity. Justify their inclusion in fiscal sustainability frameworks using recent reports and state examples. Recommend institutional and policy tools like comprehensive fiscal risk statements, audit reforms, and integrated debt dashboards to improve transparency. Conclusion Conclude with a solution-oriented line stressing the need for transparent fiscal accounting to ensure sustainable and accountable governance.
Why the question The question is relevant due to the recent scrutiny of NITI Aayog’s Fiscal Health Index (2025) which ignored off-budget borrowings and contingent liabilities, raising concerns over transparency in state finances.
Key demand of the question The answer must examine how off-budget and contingent liabilities pose hidden fiscal risks, explain why they should be integrated into sustainability assessments, and recommend tools for their transparent measurement.
Structure of the Answer:
Introduction Introduce how India’s official debt understates real fiscal stress due to off-budget borrowings and contingent liabilities.
• Explain how these hidden liabilities create fiscal risks by deferring deficits, increasing inefficiencies, and threatening inter-generational equity.
• Justify their inclusion in fiscal sustainability frameworks using recent reports and state examples.
• Recommend institutional and policy tools like comprehensive fiscal risk statements, audit reforms, and integrated debt dashboards to improve transparency.
Conclusion Conclude with a solution-oriented line stressing the need for transparent fiscal accounting to ensure sustainable and accountable governance.