Why Punjab’s debt trap is deepening

THE NITI Aayog, in its latest Fiscal Health Index (FHI) for 2023-24, has flagged the issue of the states’ indebtedness. The think tank has urged the states to adhere to the Fiscal Responsibility and Budget Management Act (FRBMA) norms for public debt. Punjab, Kerala and West Bengal have continued to be the most fiscally distressed and heavily indebted states.Punjab's debt is estimated to exceed 45% of the GSDP. The state has large subsidy commitments, especially for electricity and agriculture. West Bengal faces similar issues, with committed expenditure on salaries and interest payments consuming most of the revenue receipts. Kerala's debt burden is due to expansive welfare spending and relatively modest revenue growth.High debt and persistent revenue deficits reinforce a vicious cycle. A revenue deficit arises when a government's revenue expenditure, namely salaries, pensions, subsidies and interest payments, exceeds its revenue receipts. In such situations, states are effectively borrowing not to build infrastructure but to finance day-to-day administrative expenses. This reduces fiscal flexibility and limits the capacity to invest in long-term development projects.The GST, while creating a unified national market and improved tax compliance, has considerably reduced the control of the states over sales tax, value-added tax, etc. These provided a revenue base which could be adjusted according to the fiscal needs of states. Inadequate tax mobilisation has pushed states towards excessive borrowing. Plan funds stopped after the winding up of the Planning Commission.The proportion of untied grants by the Centre has shrunk. The revenue deficit grant recommended by the Finance Commission for the states to bridge the revenue gap has been scrapped by the XVI FC. The proportion of cesses and surcharges, which are not shareable with the states, is increasing compared to the shareable taxes in the gross tax revenue of the Centre.Punjab's debt crisis is the result of multiple structural and policy failures — a combination of the factors cited above, along with others specific to the state. The Centre has not been disbursing the funds meant for Punjab in a timely manner. There is a huge backlog of the Rural Development Fund (nearly Rs 8,000 crore), the special grant for floods as announced (Rs 1,600 crore), the GST share is not received on time, etc. Understanding the origins of Punjab's debt is essential to know the problem.Punjab was billed by the Centre for maintaining paramilitary forces in the state during the insurgency period from the 1980s to the early 1990s. The amount was converted into a special term loan, which was 20-25% of the GSDP. The industrial sector came to a grinding halt during the same period, thereby reducing tax collection, and capital flight from Punjab eroded the tax base.The overuse of ground water and other inputs during the Green Revolution period deteriorated the soil and ecology of the state.The free power policy for the agriculture sector was started in 1997 to help farmers tide over the increasing cost of irrigation due to the falling water table. It continues to date. The GSDP growth slowed due to agricultural deceleration and by 2010, the debt-GSDP ratio increased to 30%, which exceeded the FRBMA limit, but could still be managed if it was taken seriously by the ruling government.Fiscal profligacy and structural mismanagement of state finances further exacerbated the problem over the years. Some practices, showing the flouting of accounting norms and diversion of funds, have been flagged by the CAG from time to time. The Punjab government has repeatedly ignored the purpose and rules governing certain grants.A case in point is the cash credit limit (CCL) gap of Rs 31,000 crore identified by the RBI in 2016. Punjab secures a CCL from the RBI and banks as short-term borrowing to finance foodgrain procurement. Funds are reimbursed by the Centre after the FCI lifts the foodgrains and are then repaid to banks. The RBI observed a mismatch between the borrowed funds and the wheat stock in the godowns. The banks refused to lend any more for the upcoming procurement season. After considerable negotiation, the gap was converted into a "long term settlement loan", which is the most expensive loan to date. By the time it is paid off by the mid-2030s, nearly Rs 64,000 crore would have been paid. The total debt crossed Rs 1.65 lakh crores by 2016.The ways and means advances and overdraft facility, which are meant to tide over day-to-day cash flow mismatch of the states, is used cautiously and in extreme circumstances. Punjab has been using both facilities indiscriminately.The state government provides financial and legal guarantees for funds borrowed by state PSUs, which are contingent liabilities of the state government and add to the debt burden in case of default.Tax collection in Punjab is very low due to poor tax administration and huge leakages, thereby reducing tax revenue. Over the last two and a half decades, populist freebies doled out by Punjab have gone beyond the farm sector.Some of these now include free household electricity up to 300 units, where the fixed charges, electricity duty and other taxes are also not collected. Women are allowed free bus travel and over 95% of them are eligible for the recent scheme of the payment of Rs 1,000 per month for every adult woman and Rs 1,500 each per month for SC women.Not depending on the Union government for providing funds, it is the responsibility of the state to make efforts to put its economy on the development path. The economic policy of Punjab must adhere to the principles of transparency, effectiveness and accountability.It is imperative to increase tax revenue by plugging leakages, widening the tax net and strengthening tax administration. An all-party pledge and memorandum against populism is required. It could be a step towards a serious effort to turn around the economy of Punjab.The people of Punjab must reconsider the demand for freebies or we will leave the state in a shambles for posterity. A debt relief fund can be set up and Punjabis, who contribute towards every calamity, will surely rise to this 'fiscal emergency' and provide funds for debt redemption.

Why Punjab’s debt trap is deepening

The state's debt is estimated to exceed 45% of the GSDP. The state has large subsidy commitments, especially for electricity and agriculture.

Upinder Sawhney

Why Punjab’s debt trap is deepening

The state's debt is estimated to exceed 45% of the GSDP. The state has large subsidy commitments, especially for electricity and agriculture.

Upinder Sawhney

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