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.
