Chandigarh: Last month, BJP’s Rajya Sabha MP Satnam Singh Sandhu sought a reply in the House from the Union finance minister about Punjab’s burgeoning debt. Minister of state for finance Pankaj Chaudhary informed that the 2024 budget estimates had pegged it at a whopping Rs 3.51 lakh crore.
Presenting the state’s annual budget in March this year, finance minister Harpal Cheema projected Punjab’s debt to touch Rs 3.74 lakh crore by the end of the 2024-25 fiscal, amounting to more than 46 percent of the state’s total gross domestic product (GDP) of over Rs 8 lakh crore.
More than Rs 41,000 crore will be raised through borrowings and loans this year alone, the finance minister had told the assembly.
Going by these numbers, when divided by the state’s total population of over three crore, every Punjabi will likely have a debt of around Rs 1.24 lakh on their head.
Punjab’s financial crisis has forced the state to seek a bailout package from the 16th Finance Commission.
During a meeting with members of the finance commission on 22 July, Chief Minister Bhagwant Mann sought funds of Rs 1.32 lakh crore to give impetus to development in the state.
In a statement following the meeting, he said this included development funds worth Rs 75,000 crore, Rs 17,950 crore for agriculture and paddy diversification, Rs 5,025 crore for stubble-burning, Rs 8,846 crore for tackling narco terrorism and drug abuse, and Rs 6,000 crore for industry revitalisation. Apart from it, he asked for Rs 9,426 crore for urban local bodies and Rs 10,000 crore for rural local bodies.
However, economists and former bureaucrats ThePrint spoke to say that till the state puts its own house in order, the CM’s demand for a bailout package is likely to fall on deaf ears.
“If Punjab’s outstanding debt is touching 45-46 percent of GDP, where is the scope for a bailout? The government of India says this percentage should be 30-35 percent. Why would they give financial assistance to any government that is bleeding its coffers by doling out freebies?” asked Dr Pramod Kumar, who heads the Institute for Development and Communication (IDC) in Chandigarh.
Punjab’s plea for a bailout package is based on claims that the state has been steadily improving its revenue collection. The CM was at pains to explain to the commission members that “in the past two years, his government had worked for impressive growth, which even surpassed national growth rates”.
He said that revenue from the goods and services tax (GST) had gone up by 33 percent and excise revenue alone had gone up by more than 50 percent. According to Mann, this had been possible with robust administration and honest governance, which the state government had provided from day one.
Earlier this month, revenue minister Brahm Shanker Jimpa issued a press statement stating that Punjab had registered 71 percent more income under the head “stamp and registration” in July 2024. He said the state had witnessed a surge in income under the head by 22 percent in May, 42 percent in June and 71 percent in July.
In February this year, Cheema had declared that the economy of Punjab was moving in the “right direction” as revenue from taxes such as GST, excise and value added tax (VAT) in the 10 months of fiscal 2023-24 had crossed the figure of 30,000 crore, with 15.67 percent growth in GST income and 10 percent growth in excise revenue when compared to fiscal 2022-23.
The finance minister stated that the net revenue increase from GST was Rs 2,351 crore and from excise was Rs 669 crore. “Meanwhile, the state also registers 10.89 percent growth in VAT, 28.14 percent in central sales tax and 5.53 percent in Punjab state development tax,” he added.
Economists, however, warn that despite all these efforts, populist spending, subsidies, freebies, doles and ever-increasing salary and pensions bills were leaving no money for the state’s development.
In this year’s state budget, the finance minister said the government would spend almost Rs 3,000 crore less on capital expenditure than last year. The capital expenditure proposed in last year’s budget was over Rs 10,300 crore while this year it is Rs 7,400 crore.
Of the proposed Rs 1.27 lakh crore revenue expenditure for this year, the Punjab government plans to spend over Rs 35,000 crore on salaries and wages, and another almost Rs 20,000 crore on pensions. Of the rest, almost Rs 24,000 crore will go in payment of interest.
Another Rs 9,330 crore has been allocated for power subsidy for agriculture and Rs 7,780 has been kept aside to offset the power bills of those domestic consumers who get zero bills in case the consumption of power is less than 300 units per month.
Prof Ranjit Singh Ghuman of Guru Nanak Dev University, Amritsar, a renowned financial expert on Punjab, told ThePrint that the state was in a “precarious situation”, where it was being run entirely by taking loans, with the annual average debt increasing.
“Data from the Reserve Bank of India shows that Punjab is among the top five indebted states of the country and on the top when it comes to per capita debt,” he added.
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Punjab’s debt trap
Ghuman asserted that Punjab was taking more loans to service old ones.
“In 1981, the total debt of Punjab was just Rs 1,009 crore and 10 years later, it increased to Rs 7,102 crore. In the decade that followed from 1991 to 2002, the average annual increase in debt was a little less than Rs 3,000 crore. In the next five years till 2007, the average annual increase was Rs 3,418 crore. Then from 2007 to 2012, the average annual increase in debt was Rs 6,389 crore,” he said.
“From 2012 to 2017, the average annual increase in debt was Rs 19,885 crore but this can be explained in terms of the state having to convert Rs 31,000 crore food procurement imbalance into a loan. From 2017 to 2022, the annual average increase in debt was almost Rs 20,000 crore. In 2022-2023, the state took loans worth Rs 32,500 crore and in 2023-24, the average annual increase in debt was over Rs 29,000 crore. The state is already in a debt trap. We are taking more loans to service old ones,” he explained.
Former Punjab Governor Banwarilal Purohit, too, highlighted the state’s shocking indebtedness in a letter to the CM in September last year. He asked Mann to explain why the debt on the state government had increased by Rs 50,000 crore under the Aam Aadmi Party (AAP) dispensation, ever since it came to power in March 2022.
Mann told the governor that the loans taken were largely spent on servicing the debts that had already been taken by governments in power before AAP. A mammoth Rs 27,016 crore went into interest payments on the debt which the government inherited, the Punjab CM said.
Mann asked the governor to direct his efforts to urge the Centre to release the pending Rural Development Fund amount of around Rs 5,500 crore to Punjab.
‘Both state and Centre to be blamed’
The CM and his party MPs have been accusing the BJP-led NDA government in power at the Centre of withholding funds from the state.
“These are to be used for constructing mandis and roads in rural areas,” said AAP MLA Dinesh Chadha, addressing a press conference last month. “The BJP’s hidden agenda is exposed. They want to end the mandi system in Punjab and take revenge from Punjab farmers.”
According to Ghuman, if the Punjab government blamed the Centre for its financial condition, it was not entirely wrong.
“The Centre is to be blamed for abandoning Punjab on several counts. For instance, it gave concessions to bordering states, due to which industrial development in Himachal Pradesh, Jammu and Kashmir and Uttarakhand has overtaken that in Punjab. Secondly, the Centre has imposed a trade embargo from Punjab to Pakistan which has adversely affected the state economy. And thirdly, Punjab being a border state has not been able to attract the kind of investment which other states have and for that, the Centre needs to compensate Punjab,” he said.
“Even while sermonising to Punjab’s farmers to diversify from paddy cultivation, the Centre conveniently forgets that 30-40 years ago it was the Centre that had pushed Punjab to grow paddy to become a grain-surplus country. Now when grain is surplus and Punjab’s water table has depleted, no compensation is being given by the Centre,” Ghuman added.
He blamed the Punjab government as well for the state’s current financial crisis.
“To begin with, Punjab has to shift from giving universal subsidies to giving subsidies only to targeted and deserving people. Then, the state has to find ways of increasing revenue. We are not even planning in that direction. We don’t have an agriculture policy and the industrial policy that is laid out is not development-oriented. Lastly, the state should learn to spend judiciously and manage its finances better. If anyone says that they have been able to curtail corruption in the state, it is not true because it is rampant in almost every government office,” pointed out Ghuman.
Retired IAS officer K.B.S. Sidhu, who served as Punjab’s finance secretary, also told ThePrint that the state was indeed in the doldrums financially. “Punjab’s finances need a surgical intervention. medicines are not going to work anymore,” he said.
“A significant financial burden for Punjab comes from power subsidies, particularly for the agriculture sector. In 2023-24, the state allocated Rs 8,881 crore for this subsidy. From January 1997 to 2023-24, the cumulative amount dedicated to the agriculture sector’s power subsidy reached approximately Rs 1,23,904.84 crore. For 2024-25, a total of Rs 22,000 crore is projected for power subsidies, distributed among agricultural pumps, domestic consumers, and the industrial sector,” he said.
Sidhu also pointed out that “Punjab is overstaffed and the staff is overpaid”.
“That’s the grim truth. For 2023-24, committed expenditure, which includes salaries, pensions, and interest payments, amounted to 75 percent of revenue receipts. Salaries specifically account for 35 percent of revenue receipts. Then we have an ever-rising pension bill. It is a major component of the government’s spending and is slated to rise by 5 percent to Rs 18,000 crore in 2024-25 from the revised estimate of Rs 17,200 crore in 2023-24. Pensions account for about 19 percent of expenditure in 2024-25, up from 9.8 percent in 2011,” said Sidhu.
“The cessation of GST compensation (from the Centre) from June is expected to lead to a minus of Rs 15,000 crore which is going to compound Punjab’s financial problems. We are going to have no funds left for capital expenditure, investments and soon we might start defaulting on salaries too,” he added.
‘Rationalise subsidies, review freebies’
Sidhu said the state needs to take smarter decisions and rationalise subsidies.
“Solutions lie in taking wise decisions. Especially when it comes to subsidies. These have to be moderated and rationalised. Power subsidies to the agriculture sector for instance can be frozen and linked to productivity. They can be given as a cash component after the produce is brought to the mandis. Similarly, free power in the domestic sector to urban consumers can be rationalised,” he said.
“Punjab is now consulting Arvind Subramanian, a former economic adviser to the Government of India, and has sought a bailout package from the 16th Finance Commission. Let’s see how that plays out,” he added.
Dr Pramod Kumar said political parties do not come out with manifestos but “menufestos”.
“On the menu is free monthly grants, free power, free travel, free this, free that and everything across the board. Freebies are not the same as subsidies. Freebies don’t lead to any development or equitability unlike subsidies which are given to a certain section that has lagged behind or needs to be assisted in overcoming poverty. Freebies bleed the finances without leading to any uplift of the state,” he said.
“The IDC has prepared the Punjab Vision 2047 document for the state’s planning department and one of the key suggestions is that subsidies too need to be rationalised,” he added.
‘Situation can still be redeemed’
Leading Punjab economist Dr Sucha Singh Gill, who headed the economics department at Punjabi University, Patiala, told ThePrint that the state’s bureaucracy was largely responsible for the financial mess.
“They lack commitment and creative thinking. Punjab is on the brink of a financial disaster but the situation can still be redeemed if immediate steps are taken. To begin with, the government needs to consult the state’s own experts who can offer tangible solutions,” he said.
“On the expenditure side, there is an urgent need to rationalise subsidies. Those who pay income tax should not be given the benefit of zero electricity bill or free travel in buses. The agriculture power subsidy can be limited to a single tubewell or to only those having less than 5 or 7.5 acres of land. We can even follow Haryana’s example and offer central scheme subsidies for farmers to install solar panels to run tubewells. That will save the state government a lot of money,” said Gill.
“On the revenue side, the government should plug loopholes and leakages. At least Rs 35,000 crore can be saved if the government identifies the leakage points and takes planned steps towards plugging them,” he added.
Punjab economist and author Dr Pritam Singh who is professor emeritus at UK’s Oxford Brookes University told ThePrint that the genesis of the financial problems of the state were the dark days of militancy when central forces were deployed in the state for a long period of time, for which the state had to pay from its own coffers.
“The period of militancy did not only lead to a financially stressed state government, it also had a severe social and psychological impact on the people, impacting the ethical fabric of society,” said Singh.
“First, the Centre needs to consider giving Punjab a bailout package. The World Bank does it for countries all the time. Second, for Punjab and other productive states, the over centralised structure of devolution of central taxes does not work. Taxes like GST are gathered from Punjab and given to unproductive states like UP and Bihar. That is punitive to highly productive states. States need money for day-to-day expenses and the Centre takes its own sweet time to give the money it gathered from the state back to the respective state. This entire equation between the Centre and states needs to be reviewed,” he added.
“I have a rather radical suggestion and I need more data to back it, but the state government can impose a special levy on its super rich. The billionaires and millionaires who have taken so much from the state need to give something back. The rich can be graded according to their riches and charged accordingly,” said Singh.
(Edited by Nida Fatima Siddiqui)
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