Sink or swim, the onus is on Punjab

PUNJAB’s economy has been facing myriad challenges since the mid-1980s. The floods during a prolonged monsoon this year not only caused a heavy loss of life and property but also flagged an urgent problem — dealing with the fast-changing climate conditions in the region.

The impact of the interlinked challenges is reflected in the slow economic progress of Punjab, which is lagging behind several other progressive states. This regression is a matter of concern for policymakers, the intelligentsia and the masses of Punjab.

Successive state governments have made claims about bringing more investment to Punjab to rejuvenate its economy, but evidence paints a grim picture. The gross fixed capital formation (an indicator of the capacity to produce output) continues to stagnate at 15.44 per cent of the Gross State Domestic Product (GSDP). Low capital investment is caused by the burgeoning debt-GSDP ratio (around 47 per cent, the highest among major Indian states). Punjab is neck deep in debt, and each incumbent government promises to reduce the burden. However, it only ends up adding to the ever-growing debt.

Both production and employment are hampered by low-value-added and low-wage economic activities. This phenomenon forces job aspirants to seek opportunities overseas, where they expect their aspirations and dreams of upward mobility to be fulfilled. A state of despair is pushing the most productive young human capital to migrate.

Despite attempts at diversification, the agriculture sector has failed to escape the vicious wheat-paddy cycle, even as the depletion of scarce natural resources has reached alarming proportions.

Punjab is a bulk producer of agricultural commodities and biomass. Farmers suffer losses whenever crop prices crash due to a glut in markets. Burning of agricultural waste is a perennial problem without a long-lasting solution. The manufacturing sector is small in scale and devoid of innovation.

The institutional framework comes under stress when corruption goes unchecked. This gridlock prompts investors to opt for other states.

A dysfunctional fiscal policy is weighing Punjab down. Ideally, the role of fiscal policy is to spur innovation and incentivise economic activities for growth in the long run. Instead, unjust and unfair subsidies (for example, free electricity to households) are being doled out through monetisation of land and other assets and borrowings for the sake of vote-bank politics. The famed entrepreneurial spirit of Punjabis is getting stifled. Consequently, Punjab’s economy is facing underdevelopment, even though the fourth Industrial Revolution and digital technologies have ample opportunities to offer.

How can Punjab reinvent itself to return to the path of sustainable development and regain its pride of place among the states? Considering its financial health and governance model, Punjab alone may not be able to create conditions to turn the tide. A geopolitically strategic state that provides food security to the nation has a legitimate claim to expect handholding by the Centre.

However, Punjab’s economic crisis has worsened in recent decades. The 13th Finance Commission (2010-15) had proposed a package for three debt-stressed states — Punjab, Kerala and West Bengal. However, the package did not see the light of day largely due to an absence of Centre-state coordination.

An alternative that has emerged during disasters is philanthropy. Punjabis living in India and abroad have made collective efforts to provide timely relief and rehabilitation services to flood-hit people. The community has succeeded where the government failed.

In the process, the credibility of the political leadership to govern and enjoy the trust of the people is at stake. The state government has borrowed a city-state model of governance and development, which is distortionary, unsustainable and not suitable for the geographical conditions of Punjab. It is high time the government abandoned this model and explored an alternative that should follow a holistic and inclusive approach in sync with the realities of Punjab.

There is a need to take a cue from 2024 Nobel laureates (economic sciences) Daron Acemoglu, Simon Johnson and James A Robinson, who have reminded us that inclusive, adaptive and resilient institutions are essential for fair and sustained economic progress.

This year’s Nobel Prize winners (Joel Mokyr, Phillip Aghion and Peter Howitt) have laid stress on innovation to replace older technologies with new ones, calling it ‘creative destruction’ that facilitates economic development; the bottom line is that economic growth cannot be taken for granted as the risk of falling back into stagnation looms large. Punjab is suffering both in terms of institutions as well as innovation.

There are two policy options suggested by experts. First, a one-time switching cost for a big-bang change in public policy to put Punjab’s economy on the fast track of long-term growth. This kind of change needs huge financial resources that are available with the Union government. Second, the state government should make short-, medium- and long-term plans. This requires a review of socially unjust subsidies that are burdening the state’s exchequer.

The Punjabi community is ready for change and willing to bear the cost of this change. Only a trustworthy political leadership can harness the resources available while ensuring people’s participation in inclusive and sustainable development.

Lakhwinder Singh is Visiting Professor of Economics, Institute for Human Development.