Gifts strain Punjab’s financial resources: The Tribune India

Ranjit Singh Ghuman

Eminence Professor, Punjab School of Economics, Guru Nanak Dev University

Considering the acute financial crisis, debt trap, decelerating growth and huge unemployment in Punjab, gifts should only be given to truly deserving sections of the population. Illogical and untargeted giveaways would not be good economics or good long-term policy, as they are likely to have a negative impact on economic growth, employment and development. However, investment in education, skills development and health is a sine qua non for human capital development and overall socio-economic development. So, instead of spending scarce and additionally mobilized financial resources on irrational and indiscriminate giveaways, the government must spend on education, skills, health and job creation so that the population benefits from an education and quality health services at an affordable cost.

Proponents of the giveaways, however, argue that if the government can write off the outstanding debt of Rs 9.91 lakh crore from 10,306 voluntary defaulters in 2017-18 and 2021-22 (and Rs 1.84 lakh crore in 2019 -20 and 2020-21 due to lower tax rate) in the business sector, then what is wrong with giving freebies to other segments of the population.

Critics of freebies, however, argue that there are huge hidden (long-term) costs of irrational freebies in terms of missed opportunities. Experts, however, are widely of the view that caring for the poor and marginalized sections of the population is the duty of the welfare state, but, while giving freebies, the government’s fiscal capacity is a key factor. Without getting into the rationality and irrationality of freebies, the subject needs informed public discourse as it morphs into relentless competitive political populism with each subsequent election. In such a scenario, people are often unable to make informed decisions regarding their interests. The White Paper released by the Government of Punjab in June 2022 admits that Punjab is going through a severe financial crisis which is reflected in ever-increasing debt, high revenue and budget deficit and rising debt service.

According to the RBI, the debt-to-state gross domestic product (GSDP) ratio and revenue deficit in Punjab are the highest, while the budget deficit is the second highest among the 17 states in the general category. Outstanding government debt fell from Rs 83,099 crore (31.17% of GSDP) in 2011-12 to Rs 2.58 lakh crore (42.54% of GSDP; highest of all states, according to the RBI) in 2020-21 and at around Rs 2.82 lakh crore in 2021-22. This, added to the off-budget debt burden of public sector enterprises, amounts to 53% of the state’s GDP.

It is about 4.4 times the Punjab government’s current account revenue in 2021-2021. Debt per capita in Punjab is the highest among the 17 states in the general category of India. The budgetary provision for loans of Rs 35,000 crore in the financial year 2022-23 will further increase the debt burden. The debt service amount increased from Rs 8,955 crore in 2011-12 to Rs 32,080 crore in 2020-21. Debt service consumed Rs 32,080 crore out of the gross borrowing of Rs 32,258 crore in 2020-21; in 2021-22, it was Rs 36,512 crore.

Clearly, the Punjab government is in a debt trap, as debt service is provided by additional borrowing. The blatant under-mobilization of latent financial resources, coupled with an irrational competitive political populism aimed at capturing votes, among others, were mainly responsible for such a scenario. Stopping GST compensation from July 1, 2022 will require mobilization of additional resources in the amount of Rs 12,000 to Rs 15,000 crore or require additional loans in 2022-23.

The deceleration in the growth rate over the past 30 years is also a cause for concern. In terms of growth rate of GSDP, Punjab ranked between 13th and 17th during the period 1992-2012 among 17 states in the general category and between 18th and 24th among 28 states during of the years 2013-14 and 2017-18. In terms of net income per capita, Punjab started to lag behind Maharashtra in 1995-96 and in 2011-12 and 2018-2019 Punjab hovered between 11th and 12th position and slipped to 19th in 2019-20.

In terms of capital expenditure and capital expenditure per capita, Punjab ranks 11th and 17th respectively among the 17 states in the general category. In 2011-2012 and 2020-21, capital expenditure was only around 0.7% of Punjab’s GDP. Compared to the average for all of India, Punjab’s investment to PISG ratio (a prerequisite for economic growth) has been well below the national average since 1996-97. All of this has led to a deceleration in the rate of growth and an increase in unemployment.

Existing gifts and newly pledged “guarantees”, including Rs 1,000 per month for each adult woman, by the Aam Aadmi Party (AAP) in Punjab will devour Rs 28,962 crore in 2022-23. This is beyond the free bus ride facility for all women granted by the outgoing Congress government. Debt service will consume another Rs 36,009 crore, while Rs 46,317 crore will go to wages, pensions and retirement benefits. The total stands at Rs 1,11,288 crore (116.68% of total budgeted revenue of Rs 95,378 crore), resulting in a revenue shortfall of Rs 16,000 crore. It requires an effective and complete mobilization of latent financial resources and a rationalization of gratuities. But that would require strong and unequivocal political will and rational decisions.

Punjab’s ranking in own tax revenue per capita is eighth among the 17 states in the general category. The share of non-tax revenue in total government revenue fell from 28% in 2008-09 to 9-12% in 2020-21. Punjab’s own tax-to-GDP ratio fell from 7.49% in 2012-2013 to 4.95% (a drop of 2.54 percentage points) in 2020-21. This alone led to an under-mobilization of latent financial resources to the tune of Rs 16,012 crore in 2020-21. My own estimates (now included in the sixth final report of the Punjab Finance Commission submitted to the government in March 2022) show that it is possible to mobilize additional financial resources to the tune of Rs 28,500 crore per year without imposing a tax additional. The breakdown is as follows: excise duty of Rs 5,000 crore, Rs 9,000 crore GST, stamp and registration of Rs 2,000 crore, mining of Rs 3,000 crore, land tax of Rs 3,000 crore, business tax of Rs 1,500 crore, Rs 1,500 crore theft of electricity, transport and cable of Rs 2,500 crore and theft of Rs 1,000 crore in social protection schemes.

Another Rs 10,000 crore can be added to this by moderately streamlining the tax regime, gratuities/subsidies and discretionary spending. The government and people of Punjab have no choice but to mobilize additional funding, use it wisely and streamline gratuities.

Louis R. Hancock