World Bank Highlights Karnataka’s Fiscal Strategy for Other States

World Bank has highlighted Karnataka’s fiscal reform model as a best practice for other states. In a report submitted to the 16th Finance Commission, the World Bank noted that Karnataka’s decision in 2014 to include borrowings of public sector undertakings (PSUs) and special purpose vehicles (SPVs) in the state’s liabilities helped improve fiscal transparency. This approach, the report says, can help states curb hidden debt and strengthen budgetary control.

Karnataka’s 2014 Reform: What Did the State Do?

• In February 2014, Karnataka amended its Fiscal Responsibility Legislation Act to broaden the definition of state liabilities.
• This meant that loans raised by state-owned PSUs and SPVs were no longer kept outside the budget.
• Instead, they were treated as part of the state government’s total debt.
• According to the World Bank, this step reduced the scope for off-budget borrowing and provided a more realistic picture of Karnataka’s financial position.
• The reform strengthened accountability and improved fiscal reporting standards.

Why Off-Budget Borrowing Is a Major Concern

• The World Bank report points out that many Indian states rely heavily on off-budget borrowing (OBB) to fund subsidies, infrastructure projects, and loss making public utilities.
• These borrowings are often routed through PSUs and SPVs, keeping them outside official budget documents.
• This practice hides the true extent of fiscal stress and creates large hidden liabilities.
• Over time, off-budget borrowing has become a quasi-permanent funding source, weakening fiscal discipline and increasing long-term debt risks for states.

Union vs States: Uneven Progress on Fiscal Transparency

• The report highlights a clear contrast between the Union government and the states.
• While the Union Government brought 93% of its off-budget liabilities, amounting to around ₹3.7 trillion, onto its balance sheet by FY2022, similar efforts at the state level have been limited and inconsistent.
• The World Bank noted that most states have not taken systematic steps to consolidate their liabilities, making Karnataka’s model stand out as a replicable example.

Data Gaps and Underreporting by States

• Analysing 12 states, the World Bank found serious discrepancies in how off-budget borrowing is reported.
• States such as Tamil Nadu and West Bengal significantly underreported their OBB figures compared to estimates by the Comptroller and Auditor General of India.
• For example, Tamil Nadu reported ₹594 crore for 2021-22, while the CAG estimated ₹12,357 crore.
• Such gaps, the report says, raise concerns about the credibility and objectivity of fiscal reporting by states.

World Bank’s Key Recommendations for States

• To address these issues, the World Bank has recommended the creation of a consolidated Public Sector Accounting System.
• It also suggests a standardised reporting framework for off-budget borrowing, to be enforced by the CAG under Article 150 of the Constitution.
• States should report all guarantees, loans, grants to state entities, revenues kept outside the Consolidated Fund, and revenue forgone through waivers.
• Lending institutions should also disclose loans backed by state guarantees.

Question

Q. According to the World Bank, which institution should enforce standardised reporting of off-budget borrowing?

A. RBI
B. Finance Commission
C. CAG of India
D. NITI Aayog