Industry Odisha Bureau, Jul 6: Since the Government of India (GoI) reportedly discloses in each annual Union Budget about the “Sovereign Guarantee”, we ought to know about its legal and constitutional basis as well as objectives being the bona fide citizens.
As per reports, “A sovereign guarantee from the Government of India is a formal assurance by the Central Government to honor financial obligations of certain entities, ensuring repayment in case of default.”
Its “Legal and Constitutional Basis”:
“Sovereign Guarantees are authorized under Article 292 of the Constitution of India, which empowers the Union Government to give guarantees on the security of the Consolidated Fund of India, subject to limits set by Parliament. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 restricts the total guarantees in a financial year to 0.5% of GDP, with any excess requiring a statement to Parliament explaining the deviation and remedial measures.”
Objectives of Sovereign Guarantees:
Sovereign Guarantee is primarily extended to achieve the following objectives (Rule 276, General Financial Rules, 2017):
To Improve Project Viability: “It enhances the financial feasibility of projects or activities undertaken by central government entities with significant social and economic benefits.”
To Enable Resource Mobilization for PSUs: “It allows central public sector companies to raise funds at lower interest rates or on more favorable terms.”
To Facilitate Concessional Loans: “It meets preconditions set by bilateral or multilateral agencies for concessional financing to central public sector companies or agencies.”
Regulatory Framework:
“The Ministry of Finance, Department of Economic Affairs centrally approves all sovereign guarantees. Administrative ministries execute and monitor the guarantees, reporting annually until the guarantee is invoked or expires. The General Financial Rules, 2017 provide detailed guidelines on grant, review, accounting, and monitoring of sovereign guarantees, ensuring transparency and public interest justification.”
Citing a glaring example in this regard, to has further been reported that, “A sovereign guarantee is provided to the Life Insurance Corporation of India (LIC). Under Section 37 of the LIC Act, 1956, the Government of India guarantees the sum assured and declared bonuses on all LIC policies. This ensures that policyholders’ claims are honored even if LIC faces financial difficulties, providing a high level of financial security and trust in the institution.”
Moreover, “Sovereign Guarantees enhance creditworthiness of projects and entities, reducing borrowing costs and attracting investment.”
In a nutshell, a “Sovereign Guarantee from the Government of India is a legally-backed assurance that strengthens financial credibility, supports strategic public projects, and protects stakeholders, with LIC being a notable example of its application.”
However, “Sovereign Guarantees are generally not extended to private companies. They are prioritized based on public interest and social/economic benefits. The government monitors the volume and risk exposure to ensure fiscal prudence.”
According to the latest available data as has been reported by media, “The Centre’s outstanding sovereign guarantees stood at Rs 3,33,455 crore at the end of FY25. During FY25, the Centre extended fresh guarantees worth Rs 43,628 crore, equivalent to around 0.13% of GDP. The government has also indicated that guarantees issued or committed during FY26 remain well under the FRBM ceiling.”
