Punjab's debt burden burgeons amid populism, freebies

The Aam Aadmi Party (AAP) government has withdrawn its controversial land pooling policy, once seen as a key instrument to fund welfare commitments and revive the state’s economy ahead of the 2027 Assembly elections. Mounting opposition turned opinion against the policy, forcing its rollback and leaving the government in urgent need of alternative revenue streams.

At the heart of the challenge is state’s growing debt and limited resources. The government is heavily burdened by its promise of 300 units of free power to all domestic consumers—a subsidy that swallows a significant share of revenue. To make up shortfalls, the state recently directed various boards, corporations and universities to collectively deposit Rs 1,441.49 crore. But economists argue this will strain institutions already struggling with pending salaries, research demands and essential expenditures.

Fiscal imbalance

• Rs 3.82 lakh crore is Punjab's current debt; it's projected to cross Rs 4.17 lakh crore by the end of 2025-26
• 122% revenue spending on debt servicing, subsidies, salaries and pension exceeds the state' revenue generation
• Rs 800 crore lost as several road projects have been scrapped by the Centre due to delays on part of the state

The state’s debt burden is staggering. Punjab now owes Rs 3,82,935 crore, with projections indicating it will reach nearly Rs 4,17,136 crore by the end of 2025-26. Close to 40 per cent of the government’s revenue is spent entirely on interest payments. Development projects have also suffered, with the Centre cancelling road works worth more than Rs 800 crore under the Pradhan Mantri Gram Sadak Yojana-III, citing delays by the state in floating tenders and executing work.

A recent paper, Understanding Economic Acceleration and Deceleration of Punjab, authored by economist Dr Ranjit Singh Ghuman, warns the state is trapped in a cycle of mounting liabilities. He attributes the fiscal crisis to successive governments’ populist measures and calls for urgent restructuring of public finances.

Data shows the acceleration of debt over decades: Annual increases of Rs 609 crore in the 1980s, Rs 2,696 crore between 1990-2002, Rs 6,389 crore in the following five years, Rs 19,867 crore between 2011-12 and 2021-22, and Rs 33,721 crore under the AAP government. The 2025-26 budget anticipates an additional Rs 34,201 crore increase in the figure.

The trend has deep political roots. Successive governments have pursued “competitive populism.” In 1997, Chief Minister Rajinder Kaur Bhattal announced free electricity for farmers with small holdings. Her successor, Parkash Singh Badal, expanded the scheme to all farmers regardless of land size. Later, Akali Dal-BJP governments offered concessions to industries, overlooking tax evasions. The Congress, during its 2017-22 tenure, relied heavily on borrowings, raising around Rs 20,000 crore every year. Economists say AAP has proven no different.

Dr Ghuman notes that in 2022-23 alone, Punjab spent 22.72 per cent of its revenue on interest payments and 18.37 per cent on principal repayments—over 41 per cent on servicing debt. Another 23 per cent went to the power subsidy, while salaries, wages and pensions consumed more than 57 per cent of the resources. Combined, these five heads of expenditure cost 122 per cent of the total revenue, a level he describes as unsustainable.

Economist Dr Kesar Singh Bhangu criticised the government’s decision to take money from key departments, calling it “unjustified and uncalled for”. Eminent economist and former PAU and Central University Vice-Chancellor Dr SS Johl also demanded tighter controls on subsidies, though he acknowledged that reform would be politically risky. Johl further argued that Punjab’s paddy-dominated cropping pattern was draining resources, citing free power use, massive water losses, stubble burning and surplus paddy production as major contributors to fiscal stress.

Both Ghuman and Johl agree that without tough decisions and targeted welfare, Punjab’s precarious finances risk spiralling further out of control.