Punjab’s struggle for economic renewal

WHEN Punjab was reorganised in 1966, the country was facing a food shortage crisis. Punjab took up this challenge and led in helping the country become self-reliant in foodgrains. The share of agriculture in Punjab's GSDP increased from 52.85% in 1966-67 to 54.27% in 1970-71. Agricultural productivity and output peaked by the late 1970s.However, the very model that delivered gains also created structural pressures. After 1980, the share of agriculture in the state's economy started declining. But instead of addressing the problems, political parties and leaders began manipulating issues to give them a religious colour. This contributed to the environment that eventually led to the turmoil of the 1980s. It derailed the development agenda due to the erosion of government institutions. The consequent dominance of bureaucracy and prolonged periods of Governor's rule imposed on the state led to a shift in priority from economic development to tackling concerns of 'security and peace'.Punjab was struggling to restore peace when the country adopted the new economic liberalisation policies in 1991. By the mid-1990s, the political leadership colluded with the bureaucracy and started following the policy of 'business as usual'. Instead of restoring the institutional framework, they began to reduce expenditures on health and education, which further weakened the capacity and capability of the younger generations.During this period, many political leaders shifted from serving public interest to becoming 'entrepreneurs', pursuing personal economic gains. It would not be wrong to say that the new economic policies proved to be a boon for the bureaucracy and political leadership, and this had damaging long-term effects on Punjab's economy and society.State administrative officials and political leaders resorted to bribery and rent-seeking from traders and industrialists, weakening confidence in the investment climate. Thus, industrial capital began migrating out, with new investment flowing to other states. Foreign direct investment also stayed away from Punjab.Over time, the terms of trade have turned against agriculture. Consequently, farmers, especially small and marginal ones, have come under severe financial stress. Rising input costs have reduced their incomes, forcing many to take loans simply to survive. This has pushed them into chronic indebtedness. A once-strong community has been pushed into poverty and many have resorted to suicide. The downward graph continues unabated even today, indicating that the agricultural crisis is deep-rooted and multi-layered.Punjab has also missed out on income and employment opportunities arising from the information technology revolution and education reforms. This was mainly due to the unavailability of skilled manpower and lack of a conducive business environment.Punjab's low Gross Fixed Capital Formation (GFCF) explains why its economic growth is lagging behind. While the national GFCF is around 29%, and that of rapidly developing states is even higher, Punjab lags far behind at around 14-15%.The exodus of both capital and human capital from the state has greatly reduced growth prospects. Thus, Punjab is caught in a multi-layered trap of slow growth-low investment-high debt. It could not create the necessary employment opportunities, especially for the educated youth.Even as Punjab faces a severe financial distress, the politics of universal subsidies and freebies with the aim of garnering votes continues.So, how can its economy be revived? To regain its lost glory, the state requires diversification and structural transformation of its economy.Punjab has been facing a chronic shortage of investment in capital formation as its investment-state domestic product (SDP) ratio has remained below the national average and is the lowest among the 14 major states. Further, investment in the agrarian sector too has been declining as the investment- agriculture state domestic product ratio has reached an all-time low of 8-9%, according to the latest estimates.It is high time investment was raised. The state's fiscal policy needs a revamp aimed at raising its low tax-GDP ratio. This can be achieved by increasing tax compliance, eliminating tax evasion and imposing new taxes.The universal approach to subsidies and freebies merely for vote-bank purposes should be eliminated. Subsidies must be targeted. They should only be provided to the deprived and vulnerable sections and only for a limited period, based on principles of social justice.While rejuvenating the economic development process is the responsibility of the state government, major and dynamic policy instruments that affect the state's growth momentum, such as monetary policy, are under the Centre's control. Central initiatives will go a long way in setting things right. To tide over the crisis, Punjab deserves not only the long-pending debt relief package but also a capability building investment revival package from the Centre. This package must cover at least the gap between the investment-gross domestic product ratios of Punjab and the Centre.An investment revival package of Rs 20,000 crore per annum for five years should help rejuvenate Punjab's economy. This will also lay the roadmap for the state's structural transformation from an agrarian economy to an industrial one and also ensure the nation’s food security.Human development and shortage of skills are also critical concerns. Strengthening the education and health infrastructure is, therefore, the need of the hour. These sectors can be rebuilt only through well-designed public policies and adequate allocation of resources. If the government uses fiscal policy effectively and with greater discipline, monetary policy can then be leveraged to generate sufficient revenue and support productive investment.Punjab's economic structure continues to be dominated by agriculture, limiting its transition to higher-value sectors. Also, the exploitation of religion for radical, cultural and political purposes has created periodic communal tension. This insecurity of life and property has been a major deterrent to investment. These factors have discouraged industrialisation in Punjab, despite its favourable conditions, such as high agricultural productivity and a large investable surplus.Additionally, if tension on the international border is reduced, Punjab and its neighbouring states will benefit. And, if the land route to Pakistan and other countries is opened for trade, it will be the icing on the cake.

Punjab’s struggle for economic renewal

The politics of universal subsidies has crowded out real development

Kesar Singh Bhangoo

Punjab’s struggle for economic renewal

The politics of universal subsidies has crowded out real development

Kesar Singh Bhangoo

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