How Punjab can reduce its debt burden

Punjab’s economy has entered a slow growth trap over the last two decades. Among the toppers in terms of per capita income till the onset of the 21st century, Punjab slid to the 10th position in 2019-20. A systematic and holistic approach is required to understand the factors that have contributed to the slow growth of the state’s economy. This will also help us identify pathways to arrest the trend.

The foremost factor that has contributed to slow growth is low gross fixed capital formation (capacity to produce output) due to lack of capital investment. This means that the fiscal policy of the state government has turned dysfunctional over time; the government doesn’t have the resources (capacity) to make new capital investment and has failed to revive the development process.

The non-functional fiscal policy is visible when we look at the accumulated debt of Punjab. According to Reserve Bank of India statistics, the Punjab Government has borrowed, from various sources, more than Rs 3 lakh crore up to March 2022, which amounts to 53.3 per cent of the Gross State Domestic Product (GSDP). If we include the pending liabilities, non-guaranteed loans and current fiscal year’s (2022-23) expected borrowing, the total accumulated debt at the end of March 2023 will exceed Rs 3.8 lakh crore. Compared with other states, Punjab has the highest debt-GSDP ratio.

Successive state governments have borrowed beyond their means and added to debt accumulation. The debt accumulation started at an alarming rate of 22.85 per cent and 40.8 per cent in 2015-16 and 2016-17, respectively. Subsequently, it continuously rose at an average rate of over 9 per cent per annum. However, the present government is also borrowing on the lines of the previous ones and thus is expected to add more debt when it will demit office. Despite all claims to fill the coffers, the government incurred a revenue deficit of Rs 15,348.55 crore in its first nine months against its own revenue deficit target of Rs 12,553.8 crore for 2022-23.

Based on the latest three-year average, the state government has borrowed over Rs 35,201.87 crore annually. But to service accumulated debt, it pays (interest payment of Rs 18,209.8 crore plus repayment of principal, Rs 14,257.98 crore) Rs 32,467.78 crore. The net availability of the borrowed funds turned out to be Rs 2,734.09 crore, which is just 7.8 per cent of the total borrowings. This clearly brings out the fact that 92.2 per cent of the borrowed funds were used for servicing of the accumulated debt. It gives a fair idea about the vicious circle in which Punjab’s economy has fallen. The available evidence shows that the state government is mired in debt. This debt trap is a drag on the revival of the economic development process.

Can the state government come out of both traps — slow growth and debt? When we assess the revenue-raising capacity of the state government, evidence shows that the government is consistently incurring a revenue deficit of more than 2 per cent of the GSDP. The revenue deficit-GSDP ratio was 2.56 per cent in 2018-19 and increased to 3.23 per cent in 2020-21. In 2022-23, the revenue realisation so far is 63 per cent of the target. Thus, Punjab’s revenue deficit-to-GSDP ratio is expected to increase further and add to debt accumulation. This runs contrary to the claims the present government made when it came to power last year. If we include the accumulated liabilities, the promised employment generation in the government sector and promised transfer payments and subsidies, the government will end up increasing expenditure without raising the desired level of revenue.

Despite the pessimistic situation, there is a ray of hope if the government take concerted steps to lift the state out of the double trap of slow growth and mounting debt.

The first option available with the government is to activate its institutional framework to strengthen the policymaking process and identify sources of tax evasion. An audit of goods and services entering the state will be helpful in recovering legitimate revenue at tax rates determined by the GST Council. The non-tax revenue of the state government has gone down from more than 30 per cent in the first decade of the 21st century to 6 per cent in 2021-22. Obviously, this potential source of revenue needs regeneration.

As the economy is transitioning from capital asset-based income to knowledge-based income, there is scope for the state government to be innovative — devise new taxes that can build capacity to generate revenue. Above all, there is a dire need to rationalise subsidies and reorient the expenditure pattern towards faster transition of the economy to a knowledge-based economy. The suggestion needs to be worked out in detail by setting up a financial advisory committee.

Punjab is capable of raising its own revenue and making the required investment to revive economic momentum, but accumulated debt will continue to remain a big constraint. The state government should set up a commission to explore options to reduce the debt burden to at least one-half in the short term and suggest measures to pull the state out of the debt trap in the medium/long term.

Another option is to set up a debt relief fund and issue an appeal to all citizens concerned to voluntarily deposit money in the fund. This fund should only be used to reduce the state’s debt burden, while making a provision of tax exemption as in other similar cases. The government can also float bonds to provide immediate relief from the mounting debt burden.

Punjab is a strategic state in terms of providing national security, including food security, and has the legitimate right to seek compensation for the investment shortfall triggered by the turbulent situation in the 1980s and the early 1990s. Furthermore, it is suggested that the state government can seek a moratorium on debt which will not only stop the debt payment but also halt interest payments charged on the accumulated debt.

The people of Punjab had given a decisive mandate and elected the government with the expectation that it will revive the state’s lost glory. Therefore, it is high time that the government should act swiftly while showing resolve to revive the institutional setup for policymaking and take big-bang steps to break both traps — debt and slow growth — for sustainable economic development.