April , 2023
How (Not) to break the debt trap: A case of Punjab Budget 2023
10:55 am

Padma Shri Professor Dr. Ravindra Kumar

Punjab’s Finance Minister Harpal Cheema presented his first full budget on March 10, 2023. After forming the government in March 2022, Aam Aadmi Party (AAP) presented the ‘Vote on Account’ budget and then in June 2022 presented its full budget for the rest of the financial year (2022–23). Budget 2023, apart from being the first complete budget of the current government, has some other unique features too. GST compensation from the centre, that was available till June 30, 2022 (starting from July 1, 2017) for all the states, will no longer be available during the financial year 2023-24. This means that the state government will have to manage its revenue with its own resources. At the same time, the rise in interest rates has made borrowing more expensive. Interest rates that had consistently remained low since FY08 till FY22 have risen sharply since the start of the Russia-Ukraine war. During his Budget speech, the Punjab finance minister revealed that Punjab’s Gross State Domestic Product (GSDP) will remain Rs.6.98 lakh crore in 2023-24, which is Rs.60,000 crore more than Rs.6.38 lakh crore in 2022-23. However, what needs attention in this context is that in the year 2020, the then finance minister Manpreet Badal estimated Gross State Domestic Product to be Rs. 6.44 lakh crore during 2020-21. Hence, it can be inferred that Punjab has come out of the effect of Covid-19.While the state government described Budget 2023 as a tax-free budget focusing on agriculture, education and health sector in Punjab, opposition parties lamented that this budget has dashed all hopes of the common man. The budget is silent on women’s social security, old age pension and widow pension that was promised by the Aam Aadmi Party before coming to power. Also, it is being highlighted that due to irrational and inadequate provisions, the budget will soon push the state into debt.Receipt side trendWhen we analyse the receipt side of the budget, documents show that the government is expected to collect ` 98,852 crore during 2023-24 from various sources which is about Rs.3,000 crore more than last year’s budget estimates. However, deeper analysis shows that the revenue from taxes that was estimated to be Rs.45,558 crore in Budget 2022 is now estimated to be Rs.51,835 crore during Budget 2023. Although the government expressed that this growth will accrue on account of higher GST, VAT, urban development, and vehicle sales, etc., yet the revelations of Punjab government are not free from suspicion.

In fact, the central government and the Reserve Bank of India have already declared that India’s economy will grow at a slower pace in 2023-24 vis-à-vis last year because of high inflation and interest rates. Hence, the projections of higher tax revenue earnings of the Punjab government amid a slowing economy are far from reality. The only proposition to earn more tax revenue by the government turns out to be the additional levying of taxes (under state government’s jurisdiction) on the people of Punjab in the future.

Expenditure side trendAgainst a revenue of ` 98,852 crore, the Punjab government for 2023-24 has estimated a total expenditure at Rs.1,96,462 crore, which is almost double the amount of revenue earned.When we further analyse various heads of expenditure, it gets reflected that ` 74600 crore will be spent on the committed liabilities of the government viz. salaries, pensions and interest payments on loans. This amount tantamount to 75% of the total revenue (98,852 crores) projected to be earned in 2023-24. Further, a sum of `49,000 crore has been earmarked for other expenditure, of which a large chunk (Rs.20,000 crore) is listed for the power sector, which naturally leaves a minuscule amount for the development of all other segments. Thus, it is not difficult to comprehend from here that the allocation of grants to education, health and agricultural sectors will be obtained by cutting down the grants of some other sectors. It becomes pertinent to mention here that the government has also reduced the allocation on capital expenditure which strengthens the infrastructure (construction of roads, bridges, dams, power houses, parks) in an economy. The allocation for capital expenditure has been reduced from Rs.10,981 crore (2021-22) to Rs.10,354 crore. What is astounding here and can trigger a separate debate is that the government’s own accounts testify that the government has not spent even a third (till January 2023) of the proposed Rs.10,981 crore allocated last year.Debt analysis of PunjabBudget 2022 had proposed borrowings of `35,050 crore for the year 2022-23, but this year budget documents show that the government may have to borrow Rs.45,400 crore by the end of FY23 on account of a shortfall in revenue. For FY24, the government’s target is to raise a debt of Rs.49,000 crore. However, as discussed above, fiscal trends may take a reverse turn once again in 2023-24 due to the slowing down of economic activities that may compel the Punjab government to borrow more than it has proposed. Budget documents show that the government has proposed to take a market loan of Rs. 45,700 crore by pledging government securities. Ironically, rates of interest have already been hiked by the banks since 2022 and the Punjab government’s fiscal reputation is not very sound (Debt GSDP ratio being highest in the country), that will make the raising of loans from the market more expensiveBreaking the debt trapAt the outset, the Punjab government should be crystal clear if it wants to get rid of the debt that is mounting day by day, or wants to further drown in debt by offering free services to the masses by taking additional loans. Unless and until the government is itself not clear in its intentions, the ad hoc measures will continue to pave their way in each budget and the state will continue to sink in the sea of debt.

If the state government is serious and wants to break open the debt trap, it should at first constitute an expert commission by including the experts from all walks who in turn should make a long-term operational policy by factoring in the changes likely to take place in the next five years. Allocation of grants to different sectors should also be made as per the recommendations of this expert commission. As mentioned above, the Punjab government’s efforts to attract private investment have not fructified so far – at least on the ground level. With interest rates skyrocketing and macro-economic fundamentals weak, hardly any corporate will dare to invest in the state. Even if it is assumed that some corporate group(s) come forward to invest in Punjab, then also this investment will take time to get government approvals. During this gestation lag, not only will the state government accumulate more debt but the demographic dividend will also start fading away. In order to circumvent this, the state government should initiate and make an additional capital expenditure. 

A cursory look at the history of development of today’s developed economies reflects that before industrialisation, these economies encouraged the improvement of their rural infrastructure and small-scale industries. When small scale industries developed in the villages, people started getting income through employment, rural infrastructure improved and big industrialists got ready for further investment. The development of agro-based industries proposed by the Punjab government can be structured in this light.Without a proper policy and with a wavering mindset, invest-ment will continue to get misplaced sometimes on health, then on education, agriculture and occasionally on rural develop-ment etc. This will not only lead to the wastage of valuable resources but also aggravate the state’s debt situation.

  Dr. Rajiv Khosla is Associate Professor at DAV Institute of Management, Chandigarh


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