Punjab needs fiscal discipline to escape debt trap

The Punjab Government is caught in a trap due to the intensifying debt burden, a high debt to GSDP (Gross State Domestic Product) ratio and fiscal deficit. To address the problem, the government has recently appointed two financial advisers, Arbind Modi and Sebastian James. As per media reports, Modi has suggested enhancing revenue by plugging loopholes in the tax collection, though he has maintained silence on the freebies being distributed.

Earlier, too, the AAP government had sought advice from a top economist, Arvind Subramanian. Prior to that, the Capt Amarinder Singh government had constituted an expert committee under the chairmanship of Montek Singh Ahluwalia.

However, despite such efforts, Punjab’s fiscal crisis has been worsening. According to the RBI, Punjab’s debt-GSDP ratio and per capita debt are the highest among all states.

The success story of the Green Revolution had not only put Punjab’s economy at the top among the states but also helped the country achieve the much-needed food self-sufficiency. However, Punjab could not sustain its top performing position beyond the early 1990s as it could not translate its success in agriculture into developing other sectors, especially manufacturing and industry.

Since then, Punjab’s growth rate has been lagging behind the national average by 1.6 and 2.7 percentage points between 1992 and 2012. The corresponding difference was 1.1 percentage points between 2014 and 2023.

In terms of growth rate, Punjab’s rank during 1992-97, 1997-2002, 2002-07 and 2007-12 among 17 general category states was 13, 9, 14 and 16, respectively. Between 2014-15 and 2022-23, Punjab ranked nineteenth among 21 major states. In terms of per capita income, it started slipping from its top position in 1995-96 and came down to the eleventh rank during 2011-19. It further slipped to the 13th position in 2021-22.

Significantly, Punjab’s gross domestic capital formation (GDCF), the backbone of economic growth, started lagging behind the national average in 1994-95 and the gap has only been widening, especially since 2003-04. During 2011-12 and 2022-23, the gap varied between 16 and 26 percentage points.

As a consequence, the annual average investment-deficiency in Punjab (assuming Punjab’s GDCF was equal to the national average) between 1994-95 and 1998-99 was to the tune of Rs 861 crore. It increased to Rs 21,817 crore between 2004-05 and 2010-11 and further to Rs 71,322 crore between 2011-12 and 2022-23. In terms of the ratio of capital outlay to capital expenditure, Punjab’s position slipped from the 13th slot in 2011-12 to the 17th in 2018-19.

The decline in the ratio of per capita capital outlay to per capita capital expenditure from 57.23 per cent in 2011-12 to 34.23 per cent in 2018-19 also had an adverse impact on the state’s growth rate.

The shift in the state’s orientation from development to law and order during the militancy it faced in the 1980s also had an adverse impact on its growth rate, development and employment. This, along with low capital expenditure and very low ratio of capital outlay to capital expenditure, led to a huge investment deficiency. This, inter alia, explains Punjab’s lower growth rate than the national average and the well-performing states since 1993-94.

The other factors that resulted in the mounting debt burden were the lower than potential mobilisation of financial resources, irrational and untargeted freebies and subsidies given across the board and financial mismanagement. The outstanding debt on Punjab increased from Rs 7,102 crore in 1990-91 to Rs 2,81,773 crore in 2021-22 and further to Rs 3,43,626 crore in 2022-23. It is likely to touch Rs 4,50,000 crore by the end of 2026-27, the last year of this government’s term.

Significantly, the annual average increase in the outstanding debt varied between Rs 2,696 crore and Rs 6,389 crore during 1990-91 and 2011-12 but jumped to an annual average increase of Rs 19,867 crore during 2012-13 and 2021-22. During 2022-23 and 2023-24, it further jumped to an annual average increase of Rs 30,927 crore. Since 2016, the debt has been oscillating between 43 per cent and 48 per cent of the GSDP and between 312 per cent and 362 per cent of the state’s total revenue receipts (TRR).

In 2022-23, out of the TRR, 22 per cent and 23 per cent was consumed by interest payments on debt and power subsidy, respectively. The amount of power subsidy increased from Rs 5,059 crore in 2012-13 to Rs 20,200 crore in 2022-23 while the interest payment increased from Rs 6,831 crore to Rs 19,905 crore during this period.

The provision of free travel facility for women in public transport is also taking a toll on public resources. Under-mobilisation of financial resources is another drag on Punjab’s development. As per the final report of the Sixth Finance Commission of Punjab (submitted to the government in March 2022), there was a potential to mobilise an additional Rs 28,500 crore (page 88) during 2021-22 without imposing any additional tax.

Punjab-based experts are of the view that the state government’s escalating debt burden is mainly due to under-mobilisation of potential resources, their imprudent and discretionary use, irrational freebies, untargeted subsidies, financial mismanagement and misdirected development priorities over the past decades. The unsustainable competitive political populism is being followed due to lack of politico-bureaucratic will and vision.

Pilferage in social welfare schemes and development funds has also contributed to the crisis. The outside experts, despite their competency and ingenuity, are not well acquainted with the genesis of the crisis as the political leadership in power has been in denial mode. Instead of diagnosing, accepting and addressing the root cause of the persisting economic deceleration and emerging financial crisis, the political class has been indulging in gimmicks and competitive political populism.

The academia and civil society have been in a state of inertia and complacency while the public, in general, has been happy with freebies and subsidies. All this, along with institutional inertia, is resulting in a policy paralysis.