How Punjab can contain its debt burden
According to data recently released by the IMF, India's debt burden (Centre and states combined) is 83 per cent of the Gross Domestic Product (GDP). The states' and UTs' debt-GSDP ratio is 28.8 per cent, according to the RBI estimates. However, the intensity of the debt burden has varied over time and across states and UTs. This year, it is hovering between 1.3 per cent (Delhi) and 57 per cent (Arunachal Pradesh).
Punjab has emerged as the second highest debt-burdened state, with a debt-GSDP ratio of 46.6 per cent, followed by Himachal Pradesh with 45.2 per cent. Among the other major states with a high debt burden are West Bengal (38 per cent), Bihar (37.3 per cent), Kerala (36.8 per cent), Rajasthan (35.8 per cent), Andhra Pradesh (34.7 per cent) and Uttar Pradesh (31.8 per cent).
The Thirteenth Finance Commission had identified three debt stressed states — Kerala, Punjab and West Bengal. It had recommended a debt relief package for them to reduce their burden, but it never materialised. Similarly, an RBI study has predicted that five states — Bihar, Kerala, Punjab, Rajasthan and Rajasthan — will exceed the debt-GSDP ratio of 35 per cent and they will be the high-debt stressed states in 2026-27.
Punjab is a unique state, carrying a high debt burden over the last four decades. Towards the mid-1980s, it started recording a deficit on revenue account, that is incurring a higher expenditure than the revenue generated. The turmoil decade of the 1980s converted the revenue-surplus state to a revenue-deficit one and a well-governed state to a governance-deficit one.
But when durable peace was restored in the early 1990s and successive democratically elected governments completed their full five-year terms, the revenue-raising capacity of the state could not be restored.
This was due to several reasons. The most important is the slow growth of the dynamic sectors of Punjab economy — the industrial and services sectors. Punjab has been witnessing deindustrialisation in general and desertion of industry from the industrial towns of Batala, Jalandhar, Amritsar and Mandi Gobindgarh, in particular.
The ICT industrial revolution has bypassed the services sector of Punjab and, hence, its capacity to raise tax revenue has remained limited.
Its agricultural sector has served the nation's food security, but income from it is not in the ambit of taxation.
The other important factor that added to the prolonged debt stress is fiscal profligacy, which coincided with the national consensus of shifting state-led development to market-led development.
The political leadership of all hues has indulged the voters with popular schemes based on subsidies, burdening the state with additional borrowed resources.
Despite the enactment of the FRBM Act of 2002, the state governments in general and the national government in particular have violated it with impunity.
Last but not the least, the state government takes pride in presenting a budget without any new taxes. No strategic pathways have been presented either to raise the revenue or steps to reduce the debt burden. On the contrary, borrowing is done to even service its old debt. More than 90 per cent of the borrowings go towards interest payment and repayment of the principal amount.
Borrowing for redeeming debt liability is a clear case of the deep debt stress of Punjab. The AAP government has taken borrowing to the highest levels.
The standard measures tried by the Punjab Government to mitigate the crisis were the compression of expenditure, mainly on health and educational services. This, in turn, deteriorated the human capital development of the state.
Another casualty of the compression of expenditure was capital expenditure, that is, the capability to increase capacity to produce higher value of output (GSDP). This is reflected in low gross fixed capital formation-GSDP ratio.
Due to these measures, Punjab spoiled the employment quality of the state while not paying the legitimate dues to employees and paying basic salary without allowances to new recruits for the first three years. Such policy measures reduced the value of the multiplier to increase income and pushed educated youth to look for jobs in other states or abroad. Thus, Punjab has entered the 'triple low equilibrium trap' of economic growth, revenue and debt.
Now, the question arises as to what Punjab can do to come out of this trap. First and foremost, the duty of the elected government is that instead of denial, it must inform the stakeholders that Punjab is passing through a crisis of unprecedented nature and that it is time to take steps to come out of this situation.
The second step is to demand from the Central government a legitimate share of tax revenue and the share of new sources of revenue, such as the RBI's surplus from the operation of the monetary policy and cesses and surcharges beyond the constitutional provisions.
A cut in the number of centrally sponsored schemes not suitable to the state’s development level and conditions can further increase the resource flow to the state.
Trade through the Wagah border to Pakistan was stopped by the Centre. This has imposed constraints on the development of the northern states, affecting Punjab most severely. As the global geopolitical situation has changed, it is in the best interest of the nation to open trade through this route immediately. This will generate new avenues of investment in economic activities and the capacity to raise the tax revenue of the state.
The Punjab Government should establish a commission for the rationalisation of freebies and subsidies and find innovative ways of new revenue resources. A shift in the expenditure pattern keeping in view the future engines of growth is also urgently desired.
Punjab has already overpaid the interest on accumulated debt over long periods of time; it should put up a case for free interest on such debt where interest higher than the principal amount has been already paid.
A moratorium on debt may be another option to stop the debt and make the fiscal policy a dynamic tool of economic development.
