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prime concern Punjab economy Slow revenue growth, no cash flow and staggering salary and pension bill have Punjab on a sticky wicket. But it continues to overspend, hurtling beyond an overdraft limit of Rs 300 crore. Now, it’s for PUDA to raise loans by mortgaging its properties. BY Ruchika M Khanna Punjab, the land that fed the teeming millions as India struggled to come on its own, post-Independence, is going through one of the most challenging phases in its history. From being the country’s food bowl, it has been reduced to a state with empty coffers.
Coalition dharma not doing any good |
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What made Punjab hit rock bottom Slow revenue growth, no cash flow and staggering salary and pension bill have Punjab on a sticky wicket. But it continues to overspend, hurtling beyond an overdraft limit of Rs 300 crore. Now, it’s for PUDA to raise loans by mortgaging its properties. BY Ruchika M Khanna
With the country hit hard by policy paralysis and economic slowdown, Punjab is among the worst-hit states. While most other states, having enough revenues at their disposal, are also facing a much slower revenue growth, but in case of Punjab, the problem is compounded as slower revenue growth is accompanied by an ever-increasing and unbridled expenditure. The state of Punjab’s economy is no different from the typical Punjabi mentality of living beyond its means. For several years now, Punjab has been a revenue-deficit state but it continues to dole out sops and increase its administrative expenditure. Only half-hearted attempts are made to increase its income.
The past two months have been particularly bad for the state. The revenue growth is just 10 per cent — much below the target of 16-18 per cent growth. This growth is negated by the burgeoning salary and pension bill of the government, which is growing by 18.54 per cent on a year-on-year basis, while the average revenue growth of the state is just 16.43 per cent. Faced with a severe cash crunch, the state has not just exhausted its ways and means advance (WMA) limit of Rs 360 crore, but has remained in overdraft quite often. It has already borrowed money from various banks by pledging its securities; and each month it is raising Rs 700 crore by auctioning its state development loans. Left with no means of additional income in order to meet its expenditure, Punjab has asked the Punjab Urban Development Authority (PUDA) to raise loans by mortgaging its properties. These properties were handed over to PUDA for auctioning them and raising money under the Optimum Utilisation of Vacant Government Land (OUVGL) scheme. However, with no cash inflow and increasing expenditure, last month PUDA was asked to raise Rs 1,000 crore so that the government could meet its salary bills. The properties have been mortgaged with two public sector banks to raise this loan on the pretext that the money is needed to acquire land for PUDA. Interestingly, at least two leading public sector banks refused to give the loan to Punjab — they feared it would be a consumption loan rather than a productive one — before it was finally able to seal a deal with two other public sector banks. In spite of this, the state was unable to arrange for Rs 1,681 crore to pay salaries and pensions to its employees on September 1. It took almost a week for the government to ensure that it could clear the salaries of its over three lakh employees, though the pensions were released at the end of August. Fiscal indicators The major fiscal indicators for the first quarter of this financial year (April-June) present a dismal picture. The state’s revenue receipts during this period are Rs 7,446.86 crore against its revenue expenditure of Rs 8,021.27 crore. Tax revenue was only Rs 5,853.48 crore while the non-tax revenue was Rs 339.90 crore, both of which have increased over the corresponding period last year. However, the state’s expenditure has also increased, leading to a revenue deficit of Rs 574.41 crore in the first quarter. The figures also show that the gross borrowings of the state till June were Rs 2,933.91 crore and the repayment of interest was Rs 1,090.62 crore. On an average, each month Punjab continues to spend Rs 600 crore more than what it earns. When state Finance Minister Parminder Singh Dhindsa announced his budget proposals for this financial year, many people thought he was being far too optimistic when he banked on just the growth in the value added tax (VAT), excise and stamp duty collections to take the state’s revenue up from Rs 32,051 crore last year to Rs 42,666 crore during 2013-14. Thus, no new taxes were imposed in the budget. At that time, Deputy Chief Minister Sukhbir Singh Badal had maintained that since the state had announced additional resource mobilisation in September 2012, it would be “unfair” to burden the common man with more taxes. The state had increased VAT, through which it had generated Rs 1,500 crore as additional revenue last year. This year, it will generate Rs 2,000 crore through these means, says Dhindsa. However, reality hit the government very soon. With the recession hitting the country hard, Punjab was not immune to the slowdown and its tax collections started dipping. During the first quarter (April to June), the state saw a much slower growth in its VAT collections (just a 12 per cent growth) than the anticipated 25 per cent, and just 7 per cent growth in stamp duty collections as against a targeted 16 per cent growth. However, the only additional resource mobilisation that the state is still thinking of is plugging the loopholes in its tax collections and checking tax evaders. Though baby steps have been taken to increase the state’s earnings, like announcing property tax and charging fees for regularising illegal colonies that have spread across the state, lack of political consensus on the original proposals for collecting this tax and fee have marred the collections. Borrowing heavily That the Punjab Government often lives beyond its means has been corroborated in the annual report of the Reserve Bank of India (RBI) released in April this year. The report, wherein the apex regulatory bank also lists the state of finances of various states, has revealed that Punjab used the ways and means advances for over seven months last year. The advances are a source of finance meant to provide support for purely temporary difficulties that arise on account of mismatch or shortfall in revenue for meeting government liabilities. These are repayable in three months. However, the report points out that some states like Punjab are using these often as there is a perpetual mismatch between its revenue receipts and revenue expenditure. The report shows that Punjab was living on this “borrowed” money for 232 days during the last financial year. It also availed of special advances for 233 days in 2012-13. While normal ways and means advances are clean advances given to the state governments, the special ones are secured advances against the pledge of the Government of India, dated securities, and the state government is supposed to pay interest on both normal and special advances. The report reveals that Punjab had taken an overdraft on 139 days in that year. The situation is no different this year. In August, the state reached an overdraft limit of Rs 300 crore, after it had already availed its ways and means limit of Rs 360 crore. It was only after the state received Rs 400 crore as revenue receipts for this month that it managed to clear its overdraft, though it is still availing the advances of over Rs 300 crore. What’s bleeding the state Against the popular belief that it is subsidies that bleed the government the most, it is the huge salary and pension bill of the government that is draining the resources. And this bill has continued to increase. While the salary bill of the government rises by 18.54 per cent each year, the revenue collections increase by 16.43 per cent only. As against a salary and pension bill of Rs 7,688 crore in 2006-07, the bill now stands at a whopping Rs 21,149 crore. This means that 37.02 per cent of each rupee goes to pay salaries, wages and pensions. The implementation of the Fifth Pay Commission recommendations was a major setback to the already shaky economy of the state. It was forced to pay Rs 5,000 crore as arrears and pensions, of which it has already paid Rs 4,000 crore. This additional expenditure is something that the state was unprepared to handle, and this pulled it into further duress with the revenue deficit having increased sharply after the salaries were hiked. Even as the salaries were proving to be a drain on the exchequer, the SAD-BJP government in its previous avatar announced a slew of arrears for the employees and regularised various contractual employees. Over the years, Punjab’s debt burden has continued to rise. Its outstanding debt by the end of this year will be Rs 1,02,282 crore. The total debt servicing again takes a huge chunk of the total income of the state. This year, the state will spend Rs 11,590 crore on servicing of this debt. On the other hand, the subsidies — power subsidy, pensions, shagan and atta-dal schemes — do not cause as big a dent on the state’s finances as the salary and pension bill. While Rs 5,785 crore is the total power subsidy this year, Rs 350 crore is for the atta-dal scheme and Rs 250 crore is the pension bill. In all, the total amount the state spends on subsidies is around Rs 6,385 crore. What needs to be done The Finance Minister says the road ahead for Punjab lies in increasing its total revenues, which may not mean just imposing additional taxes. “We are looking at increasing the revenues by better tax compliance. Over the years, Punjab’s share in the central taxes (from the divisible pool for states) has come down. We are seeking that the formula for devolution of taxes be changed and Punjab gets 3 per cent share from the total divisible pool, instead of 1.4 per cent it gets now. Since the state’s spending on welfare schemes is high, we are seeking a higher share in central taxes,” he says. The state will also have to impose more taxes as the tax to the gross state domestic product (GSDP) ratio is among the lowest in the country. At a time when the Akalis enjoy absolute power, they will have to rise above the tangles of a coalition government and take drastic steps to turn around the state. This, for one will also mean going strong on imposing the property tax and ensuring that not only the people living in illegal colonies, but also those who made these illegal colonies, pay the composition fee to get these colonies
regularised.
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Coalition dharma not doing any good Party politics has been instrumental in compounding Punjab’s fiscal woes. Political turmoil in the 1970s and 1980s pushed the state into a whirlpool of violence that had a ruinous effect on it. Now, the ongoing cold war between the SAD and the BJP over many issues, especially those related to additional resource mobilisation (ARM) has become a stumbling block in setting things right. Since 1980s, Punjab’s growth rate has remained less than that of the national growth rate, except for a brief period of five years during the Seventh Five-Year Plan. On per capita income graph, Punjab slipped from the third place in 2002-03 to the sixth spot in 2011-12. Cold war Punjab started stabilising politically in the late 1990s. However, respective governments made no worthwhile effort to bring the derailed economy back on the track. The state continues to figure among the slowest growing states whereas states like Bihar and Gujarat have been growing at a double-digit rate. The emerging trend among parties to win elections by spending money from the government’s treasury is disturbing. Politicians are mastering the art of winning the polls by offering sops and freebies. The SAD-BJP cold war began on the issue of free power to the farm sector, a core political constituency of the Akalis. After taking over as the Chief Minister in 1997, Parkash Singh Badal announced free power to farmers in 1997. The power subsidy bill has now almost touched a figure of Rs 5,800 crore, becoming a committed liability of the government. The BJP, a coalition partner of the SAD, started protecting its core urban constituency from fresh taxes. Over the years, the BJP has opposed most tax proposals, be it house tax, property tax, entry tax on sugar, or taxing branded clothes or wheat flour. Senior BJP leaders have been pressing for rationalising the subsidy to Punjab State Power Corporation Limited (PSPCL) in lieu of free power to the farm sector. The BJP feels free power should be given only to small farmers. During the previous term, Sukhbir Singh Badal and Manoranjan Kalia committee recommended the mobilisation of Rs 4,000 crore. One of its recommendations was to charge Rs 50 per bhp from farmers for providing power to bore wells. At that time, the cost of power was Rs 283 per bhp for the farm sector. The government was to pay Rs 233 per bhp to the then Punjab State Electricity Board and the remaining Rs 50 per bhp was to be paid by the farmers. However, instead of Rs 4,000 crore, the actual mobilisation was worth Rs 1,000-1,500 crore as several recommendations were not implemented. The levying of property tax remained hanging fire for several years because the BJP leadership resisted it. It has now been levied “symbolically”. Professional tax could not be implemented as the BJP felt it would hit its urban constituency. There has also been resistance over the charges to regularise illegal colonies. The government had to revise the charges, under pressure from the BJP. Some years ago, Parkash Singh Badal had to issue a statement that the government would bear the hike in power tariff to the tune of Rs 300 crore because the BJP sought relief from tariff hike for the industry and domestic consumers. Also, there has been opposition to the e-trip system, which was to be introduced to bring about transparency in business transactions. Businessmen and manufacturers of certain goods were asked to give information electronically about their products and the mode of transportation and other details. The system was meant to check tax evasion by industries. However, the BJP made the SAD reduce its scope. Grants, which the state was to get under the Jawaharlal Nehru Urban Renewal Mission, were held up for years as the mandatory urban reforms could not be carried out. As a part of the reforms, the levying of some taxes such as property tax was a must. A new rent Act was to be enacted and the BJP had reservations about some of the mandatory reforms. None the wiser The SAD too let the situation get out of hand. Parkash Singh Badal refused to set up a water regulatory authority. Its setting up would have called for the imposition of water user charges. The state is now unable to get a grant of Rs 240 crore which was promised by the Centre to states setting up such an authority. Competitive politics has hit development. Vital institutions such as schools, colleges, universities and hospitals are unable to deliver quality services due to the shortage of funds. The capital expenditure, which is usually made on development, has been reduced to minimal.
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