April , 2024
Emerging Fiscal Scenario in Punjab
11:37 am

Dr. Rajiv Khosla

Punjab remained one of the major beneficiaries of the green revolution. Later, the state turned out to be a role model for other states and provinces in portraying how agriculture can be used as a medium for fast development. However, too much dependence on agriculture (for long) as a driver of growth in Punjab, eventually neglected the development of industries in general, and agro-industries in particular. Accordingly, the state that used to be ranked first in terms of GDP per capita amongst Indian states in 1981 recorded the second slowest GDP per capita growth rate between the years 2000 and 2010.

Punjab’s fiscal policy needs to be questioned in this context as tax and spending strategies that could have ushered in increased employment, investment, production and consumption failed miserably and placed Punjab in a state of disarray. Dwindling receipts on account of political turbulence and too much dependence on agriculture pushed the state government to finance the deficit through borrowings either from the union government or from the market particularly, during the post-reforms period. Successive governments that ruled the state in the past few years allegedly involved themselves in guzzling up the revenues for the non-developmental tasks up and making interest payments, thereby paving way for another cycle of borrowings. In 2022, the Aam Aadmi Party (AAP) government took over the reins in Punjab vowing to extend relief from debt burden and provide corruption free governance. The emerging fiscal scenario in the state of Punjab under the tenure of the AAP government is discussed in this article. The data for different time periods has been taken from the financial records of the Punjab government as well as the budget documents of the state. Figures for the year 2023-24 are based on revised estimates and for the year 2024-25 on the budgetary estimates of the state government.

Emerging Revenue Pattern

A cursory look at Table 1 shows that since 2021-22, a significant decline has taken place in the union government’s share in Punjab’s total revenue receipts through union taxes and grants. Further, the revenue received by the Punjab Government through its own taxes and non-taxes also remained wobbling. It indicates that the Punjab government is largely dependent on borrowings to meet its expenses. The documents of Punjab government reveal that even in the upcoming financial year 2024-25, the state government is not expecting any robust increase in its revenue receipts (34%) through its own tax and non-tax sources. Also, the share of allocation from union government (in Punjab’s overall

revenue receipts) is estimated to be less (16.61 percent) than the previous years. Lion’s share (48.59 percent) of total receipts is likely to come through borrowings again. Amid all this, what is indisputably apprehensive is the allocation from the central government. An in-depth analysis of the budget documents of Punjab Government for the year 2024-25 reveals that the state government is expecting to receive Rs.22,041 crore from the share of central taxes during the year 2024-25, which is approximately Rs.2,000 crore more (Rs. 19,958 crore) than the last financial year 2023-24. Similarly, Rs.11,748 crore are estimated to be received by way of the grants coming from the Centre, which is about Rs. 6,000 crore less (Rs.17,530 crore) than the last financial year i.e.

2023-24. Pertinently, the interim budget has reduced the devolution of taxes from the union to state governments from the existing 41 percent (as mandated by the Fifteenth Finance Commission) to 32 percent for the year 2024-25. Amid this, Punjab government’s optimism to get ` 2000 crore more by way of devolution of taxes from the central government seems misplaced.

Further, a reduction in the allo-cation through taxes postulates either an increase in the tax burden of the people of Punjab or alternately, incurring of expenditure through additional borrowings. In the context of revenue through own sources, it is estimated that the tax receipts of the government are likely to increase to ` 58,900 crore in the year 2024-25 against

Rs.51,400 crore earned in 2023-24. However, this too seems illogical without burdening the people of Punjab. Many rating agencies, banks and financial institutions including Reserve Bank of India have projected inflation to remain low vis-à-vis 2023-24. In general, earnings of the governments resonate with an increase in inflation.

The imposition of VAT, state excise duty, stamps and registration fee, registration of vehicles fee, electricity duty, etc. on a swollen inflation fetch additional revenues to the government. Reduction in inflation means lesser growth in revenue or more tax burden on the common people, otherwise.

Emerging Expenditure Pattern

It is evident from Table 2 that a substantial share of total expenditure (38-39 percent) (even if the partially covid affected year 2021-22 is excluded) of the Punjab government is annually spent on the committed liabilities which includes payment of salaries, pensions and interest payments. Further, no major change has taken place in the committed liabilities of the Punjab Government since 2022-23. This expenditure is followed by the repayment of the public debt on which approximately a share of 34 to 35 percent of the total expenditure is spent. Only 3 to 4 percent share of the total expenditure of the state is directed towards the capital expenditure.

Only a meagre amount is left with the state government for disbursement towards its revenue expenditure. Whatever, poll pro-mises, budget announcements or freebies are provided to the people, are largely discharged out of revenue expenditure? Crux of the matter is that the state government is absolving itself of the capital expenditure to facilitate additional spending on the revenue expenditure.

Despite the pathetic state of finances and enormous debt burden, no reduction in princely announcements of the state government has been experienced. Table 3 highlights that there has not taken place any significant change in the revenue deficit in Punjab in the post pandemic years. In value terms, continuous outstripping of revenue receipts by the revenue expenditure speaks volume about the insensitive outlook of the state government towards the state finances. This fiscal mess connotes that the government has failed to restrict its daily expenditure in line with its daily income. Though the state government is left with very little money for the revenue expenditure, yet, the government is actively providing free electricity to the households, free bus travel to the women, free visits to religious places to the masses and leaving no stone unturned in claiming all this as its achievement through big advertisements. The Fiscal Responsibility and Budget Management Act, 2003, stipulates the fiscal deficit of Indian states at 3% of their Gross State Domestic Product (GSDP), but in Punjab it has remained woefully above this limit in atleast last 4 years. (Table 3).

Emerging Debt Pattern

Table 4 shows details of recent borrowings of the Punjab Government. It is evident from the table that the pace of government borrowing is not slowing. Since 2021-22, the extent of borrowings every year has been more than Rs.40,000 crore i.e. ranging between 6 to 7% of the GSDP of Punjab. In the recent budget too, the finance minister set a target of raising government loans to an extent of Rs.42,000 crore (approx.) for the year 2024-25.

It is pertinent to mention here that there exists a difference between the gross borrowings (gross public debt) of the government and the fiscal deficit (net borrowings). Gross borrowings are the overall borrowings or loan receipts estimated to be procured by the government for the financial year for which the budget is prepared.

However, in the context of the net borrowings, the repayment of public debt in a financial year, contribution to National Pension Fund; scheme for special assistance to states for capital investment; unutilized carry forward borrowing available with the state are excluded from the gross borrowings.

The actual bone of contention here is how the state government is using the borrowed amount. No doubt, amount of public debt procured in a year is summarized under capital receipts and the repayment of public debt is shown as a capital expenditure, yet, when we analyse the difference between receipt and repayment of public debt in Table 4, we find that the receipts outweigh the expenditure by an amount ranging between Rs.28,000 crore to Rs. 30,000 crore every year. Of this amount, only a nominal sum about Rs.7,000-8,000 crore is being set aside by the government for the actual capital expenditure. This indicates that the Punjab government is expending the remaining borrowed amount for mitigating its other liabilities. In other words, the amount borrowed under capital receipts instead of being fully utilized for capital expenditure of the government is being utilized for other purposes including refinancing of debt. This is gradually pushing Punjab towards the debt trap.

The above discussion presents a unique picture of Punjab’s emerging fiscal scenario. Successive governments in Punjab have failed to match their expenses to income. When expenditure of the government exceed the amount of income, then the government compensates it through additional borrowings. Despite being burdened by a huge debt, yet there seems no urgency in government’s efforts to cut down its wasteful expenditure, even if it is for the common public. Need of the hour is to increase public capital expenditure towards the construction of basic infrastructure so that employment could be regenerated, but the emphasis of the government is on making the public addicted to freebies. Of course, a period of five years for any government is not very long for building the basic infrastructure and creating an ecosystem for growth, and hence, the existing governments have picked up an easy way to attract people i.e. increasing the freebies by reducing the capital expenditure. Though this initiative of the governments in general and Punjab government in particular, may provide momentary satisfaction to the people in the short term, but in the long run, it is ruining the lives of the people and pushing the state into a serious debt trap.

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