Understanding internal and extra budgetary resources is important for gaining clarity on how government funding operates beyond the scope of traditional budgeting. These financial resources play a critical role in supporting large-scale public sector projects, government schemes, and infrastructure development. By supplementing the annual budget, they allow various government ministries and public enterprises to access funds without putting pressure on the fiscal deficit. This dual system of funding has become increasingly relevant in recent years, particularly in countries like India where capital-intensive programs require consistent financing from both budgetary and non-budgetary sources.
What Are Internal and Extra Budgetary Resources?
Definition and Purpose
Internal and extra budgetary resources (IEBR) refer to the funds raised by public sector undertakings (PSUs) and other government entities through means that are not part of the central government’s official budgetary allocation. These resources are used primarily for capital expenditure, allowing PSUs and government departments to invest in infrastructure, manufacturing, energy, transportation, and other priority sectors without relying entirely on direct budget support.
IEBR serves as an alternative funding route, helping the government achieve its development goals while maintaining fiscal discipline. It reflects the financial strength and borrowing capacity of government-owned enterprises and often includes internal accruals, bonds, loans, and external borrowings.
Components of Internal and Extra Budgetary Resources
1. Internal Resources
Internal resources include funds generated from within the public enterprise or government department itself. These are self-earned revenues, profits, and retained earnings that can be reinvested in operations or used for capital expansion.
- Retained Profits: Surplus income after tax and dividend payments
- Depreciation Reserves: Non-cash charges collected for asset replacement
- Operating Surplus: Income from core business operations
- User Charges: Fees collected for public services provided
2. Extra Budgetary Resources
Extra budgetary resources are funds raised from outside the government budget framework. These sources are mainly borrowings and external funding mechanisms.
- Market Borrowings: Issuing bonds or debentures in the financial market
- Loans from Banks and Financial Institutions: Domestic lending by public and private banks
- External Commercial Borrowings (ECBs): Loans from foreign lenders and international agencies
- Grants and Contributions: Received from international organizations or donor agencies
Why Governments Use Internal and Extra Budgetary Resources
1. To Maintain Fiscal Deficit Targets
Governments are often constrained by fiscal deficit limits that restrict excessive spending in the annual budget. IEBR allows them to finance public projects without inflating the official deficit numbers.
2. To Finance Capital-Intensive Projects
Large infrastructure projects such as highways, railways, power plants, and digital networks require heavy investment. Budget allocations alone are often insufficient. Extra budgetary resources help fill this funding gap efficiently.
3. To Encourage Public Sector Autonomy
Allowing PSUs to generate and manage their own funds promotes greater financial independence and responsibility. This model reduces their reliance on government grants and builds their capacity to operate competitively.
4. To Accelerate Economic Growth
Timely funding through IEBR enables faster implementation of public programs, which leads to job creation, improved infrastructure, and economic expansion. It also draws in private investment when paired with public funding.
Examples of IEBR in Use
Several ministries and public sector enterprises utilize IEBR extensively. For example:
- Ministry of Railways: Often uses IEBR for track upgrades, new railway lines, and electrification projects.
- National Highways Authority of India (NHAI): Raises funds through bonds and toll receipts to finance highway construction.
- Power Grid Corporation: Uses a mix of internal accruals and borrowings to expand transmission networks.
- Housing and Urban Development: Many housing schemes are backed by extra budgetary borrowings from financial institutions.
How IEBR Appears in Government Accounting
While internal and extra budgetary resources are used for public spending, they do not appear as direct expenditures in the Union Budget. Instead, they are reflected in the budget documents as part of the total capital outlay of ministries. The Ministry of Finance reports IEBR separately from gross budgetary support (GBS).
Reporting Format
- Gross Budgetary Support (GBS): Direct budget allocations
- IEBR: Funds raised by PSUs and autonomous bodies
- Total Plan Outlay: GBS + IEBR
This format helps policymakers and analysts understand the full scale of public investment, even though only part of it is included in the fiscal deficit calculation.
Advantages of Internal and Extra Budgetary Resources
- Reduces dependence on taxpayer money
- Improves financial accountability of public sector units
- Expands the scope of infrastructure development
- Enables faster project implementation
- Encourages innovation in financing methods
Challenges and Risks
1. Transparency Issues
IEBR does not fall under parliamentary scrutiny in the same way as budgetary allocations. This can lead to concerns about transparency and misuse of funds if not monitored properly.
2. Increased Debt Burden
Relying heavily on borrowings increases the debt liability of public sector enterprises. If not managed efficiently, it may affect their creditworthiness and overall financial health.
3. Overlapping Expenditures
Sometimes, overlapping between budgetary and extra budgetary funds can result in duplication of spending or misallocation of resources, impacting the effectiveness of public programs.
4. Limited Revenue Generation
Not all investments made through IEBR generate sufficient revenue to cover costs. This can lead to long-term financial stress, especially in sectors with low user fees or long payback periods.
Improving the Use of IEBR
1. Stronger Oversight
Establishing independent review mechanisms and regular audits can improve accountability in the use of IEBR. Clear reporting standards should be enforced across all departments.
2. Better Project Selection
Resources should be directed toward projects with high social or economic returns. Detailed cost-benefit analysis and financial viability studies must guide funding decisions.
3. Integration with Budget Planning
Even though IEBR is off-budget, integrating it with broader financial planning ensures efficient allocation and avoids redundancy. It also provides a clearer picture of national investment levels.
Internal and extra budgetary resources have emerged as vital tools for financing public sector growth and infrastructure development. By complementing traditional budgetary allocations, IEBR enables governments to mobilize additional funds without breaching fiscal discipline. However, the use of these resources must be balanced with transparency, sustainability, and sound financial management. As countries aim to build resilient and inclusive economies, effective utilization of internal and extra budgetary resources will continue to play a central role in achieving developmental goals.
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