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Posted at: Apr 7, 2015, 1:00 AM; last updated: Apr 7, 2015, 1:00 AM (IST)

Reviving Punjab's economy

A number of alternative strategies available
Reviving Punjab's economy

The economic position of Punjab has been gradually deteriorating for nearly two decades as can be easily seen from the per capita income (PCI). Illustratively, Punjab recorded the highest PCI in 1993-94 amongst all the major states but by 1997-98 Maharashtra overtook Punjab. By 2003-04 the PCI of Punjab was lower than that of Maharashtra and Gujarat. Then by 2013-14 even Haryana, Tamil Nadu, Kerala, Sikkim and Himachal Pradesh overtook Punjab. Other growth indicators like the unemployment rate in Punjab are significantly higher than all the above mentioned states except Kerala. On the child-sex ratio, which has implications for future workforce participation, Punjab's record is dismal amongst many states except Haryana. This unidirectional decline in the relative economic position of Punjab has implications for employment and welfare of the local population. The secular decline can also be self-fulfilling as growth-oriented new investment in industry, construction, hotels, tourism and other supporting services move to richer states and regions in pursuit of better opportunities and higher returns.
The fiscal situation in Punjab, when compared with other states, is also not outstanding. The gross fiscal deficit (GFD; total expenditure minus revenue receipts) was 2.6 per cent of the state output (GSDP) as compared to 2.5 per cent for all states in 2013-14. Thus, the impact is visible on the outstanding debt of Punjab which is 32 per cent of GSDP compared to 21 per cent for all states. When the pressure on revenue account is high, growth-oriented capital expenditure is a casualty which in Punjab is 1.4 per cent of GSDP compared to 2.6 per cent for all states.
Punjab has to make a choice between chugging along the trend path of declining economic position or proactively pursue the path of high PCI. To correct the economic malady, macroeconomic policy is generally used by policymakers. Macroeconomic objectives of achieving high income levels and increased employment are operationalised through monetary and fiscal policies. In view of the fact that monetary policy is enunciated by the Reserve Bank of India and uniformly fixed for the country, it is the fiscal policy which plays an important role in the development process of any specific state. Therefore, fiscal policy, operating through the annual budgets of Punjab, needs to be analysed carefully to understand the secular decline in the relative economic position of Punjab.
In Punjab, examining the key indicators, the annual government expenditure on salaries and pension at Rs.25,536 crore is nearly 90 per cent of the state's tax revenue and amounts to half of the total revenue expenditure, according to the recent budget. Interest payments at Rs.9,900 crore, annually, are nearly one-fifth of the revenue receipts, given the high public debt of Punjab, and 83 per cent of GFD. The growth-oriented capital expenditure at Rs.5,242 crore is less than half of GFD and about one-third of long-term borrowings that imply future interest payments. And a similar policy of low investment and high consumption, financed by borrowings, followed for the last few decades is the cause of the dismal economic performance of Punjab.
The implementation of the proposals in the recent budget will not be able to correct the declining position of the Punjab economy despite distributing small amounts of money to different sectors in a traditional manner. Rather, the need is to transparently and honestly identify specific reasons for the slippage in the economic position of Punjab. On completing the 'identification' exercise, the government needs to prepare a vision document with milestones for Punjab's recovery, based on wider consultations, and determine a strategy which can be implemented in the 'mission' mode to achieve that vision.
Punjab has now to consider some critical issues before charting a course correction to revive the economy. Should the current strategy of assigning exclusive priority to agriculture, including free power supply, be continued or alternatives considered? On agriculture, given the depleting water table and deteriorating soil quality, should diversification of the cropping pattern be aggressively followed or alternatives like giving compensation to farmers for not cultivating rice be considered? Can the cultivation of another crop, probably maize, be incentivised by negotiating with the Union Government to consider announcing a minimum support price for maize?
A number of alternative strategies can be considered for helping the economy revive. Should industrialisation be preferred or development of the service sector be considered? In either case, it will be necessary to improve the literacy and skill levels in Punjab by spreading tele-education at the school level and increasing the number of universities, colleges and technical institutions for skill development and specialisation. Punjab, given its emigration record, could also collaborate with foreign universities.
Punjab has to decide as to which are new industries that can be attracted and then provide suitable incentives while taking advantage of the successful "Make in India" campaign of the Union Government. Illustratively, Punjab is planning to have more airports but seems oblivious to opportunities that aerospace industries provide. According to projections, nearly 37,000 new commercial planes need to be manufactured in the next 20 years in addition to helicopters, and defence and cargo planes with an investment of a trillion US dollars and capacity to create two million jobs. Presently there are only a few assembly facilities in places like Bangalore. Punjab could attract the aviation industry to open units by providing local tax incentives for producing goods, approximately million components that go inside the aircraft. Similarly, many other industries — domestic and international — are exploring venues for setting up ancillary units, and service centres, and scouting for helpful local governments. Punjab needs to be proactive with new opportunities being offered by modern India.
To conclude, soon, under the recommendations of the 14th Finance Commission, an unconditional flow of resources from the Centre to states would increase. An appropriate strategy will be to ensure that such additional financial resources are used for productive purposes and creating a conducive investment climate. Therefore, Punjab probably should consider setting up a state-level NITI Ayog and constituting an economic advisory council for wider consultations to strategise the revival of Punjab. Otherwise, two more states like Karnataka and Andhra Pradesh are waiting in the cusp to overtake Punjab, and consequently investment and employment, and the economic position of Punjab would suffer further.
The writer is the RBI Chair Professor of Economics, Indian Institute of Management, Bangalore

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