December , 2019
Understanding the fiscal mess in Punjab
15:33 pm

Rajiv Khosla

Section 4 of the Goods and Services (GST) Act states that if the collections from GST are down for any state, till the year 2022, the central government will have to pay compensation keeping the FY16 revenues of the state as base and guaranteeing 14% addition on top of it every year, out of the cess levied on five luxury goods.

Against this backdrop, the central government sanctioned `2228 crore (against `6100 crore pending) for Punjab for the GST arrears since August 2019. From the amount received, the Punjab government released `1353 crores for payments to PSPCL, Punjab State Warehousing Corporation, Local Government Department for Punjab Municipal Fund, retirement benefits of employees and for centrally sponsored schemes like MNREGA, NHM, mid-day meal etc. which were due for a long time. The question is what circumstances are responsible for pushing the state of Punjab in this state of financial vulnerability.

Reasons for the distress

At present, Punjab is caught in a vicious cycle of fiscal imbalance trap. The present state government is only making stop gap arrangements for the collection of funds and then using the same for non-developmental expenditures and interest payments, thus paving the way for another cycle of borrowings. Latest in the league is the arrangement of aid to the extent of `2130 crore from the World Bank.  But as said earlier, a major portion of this amount will also be spent on debt servicing as the debt stands at 2.29 lakh crores. The state government cannot simply pass the buck to the central government stating non-receipt of the GST share as the reason for its non-performance when the share of state GST in total tax composition of Punjab (as per budget 2019-20), stands at 45%. It means the state has to mobilise and spend 55% revenue from its own tax and non-tax revenues. But, low revenue generation, high rate of unwarranted expenditure and extensive borrowings have become a hallmark of the state.

Realistic analysis of the economic environment of the state for the past two decades shows that fiscal fundamentals dwindled between the years 1999-2000 and 2005-2006. It was also the period before the Fiscal Responsibility and Budget Management (FRBM) Act was introduced in the state. Experts lament that because of the industrial incentives package announced by the Government of India in 2003, industries moved away from Punjab towards the neighbouring state. Numbers show that large scale industries in the state decreased from 629 in 2000-01 to 340 in 2006-07, whereas small-scale industries decreased from two lakh to 1.9 lakh in the same time period. Although, the state government also tried to attract private investment by offering competitive tax concessions and incentives (change in land use charges, license fee, stamp duty exemption), due to high VAT and electricity charges, the move failed to yield favourable results. Later, provision of free power to the farmers proved to be the last nail in the coffin of the state exchequer.

When the FRBM Act was implemented in 2006, the state government to prove itself fiscally responsible and keeping the fiscal deficit within limits, started decreasing its capital expenditure. Precisely, the capital expenditure as percentage of GSDP decreased from 6.1% in 2006-07 to 1.4% in 2011-12. This decrease in investment expenditure by the government particularly on developmental activities, led to further lowering of revenues thereby pushing the state government to make up for the losses by borrowings. Initially, the borrowings were made from the banks (till 2007-08), but when banks started charging high rates owing to deteriorating financial health of the state, then the state government went for market borrowings (from 2008-09 to 2009-10) followed by borrowing from the RBI from 2010-11 onwards, till 2016-17, when the RBI refused to extend funding further. Where on one hand, the state was struggling to garner revenues and the public sector units like PRTC, PSIDC, PUNGRAIN, PSWC, SUGARFED and MARKFED were bleeding profusely, at the same time, the state government was offering concessions under SC/BC welfare and the Atta Dal schemes which ultimately squeezed the state treasury.

A white paper brought out by the government in 2017 showed how badly the state is in debt and 36% of the state’s revenue goes for debt servicing and paying salaries only. The paper highlighted that there was a huge gap of `29920 crore between the cost of buying food grains for central pool and reimbursement by the central procurement agencies (cash credit limit) between the years 2004 and 2017. In order to settle the mismatch in stock, just one day before the elections in Punjab (March 2017), the state government consented for the loan of `31000 to be paid in 20 years by paying `3240 crore per annum (`270 crore per month) which eventually ends with paying a whopping `64800 crore in 20 years. The total loans that Punjab government coughed up in the fiscal year 2016-17 amounted to `41364 crore which were seven times (`5,968 crore) the loans taken in the year 2015-16. Loans also included `10,000 crore disbursed to the Punjab State Power Corporation Limited (PSPCL) for clearing debts in compliance with the Ujwal Discom Assurance Yojana (UDAY). Under the UDAY Scheme, the Ministry of Power notified a scheme for financial turnaround of power distribution companies (DISCOMs) in 2015 wherein states had to take over 75% of the outstanding of the DISCOMs. Hence, the Punjab government had to bear `15627 crore of 120837 crore outstanding debt of PSPCL in two years i.e. 2015-16 and 2016-17 which ultimately led to a fiscal mess in the state.

What should be done?

The Punjab government like any other state will try to mobilise revenues by imposing taxes on items, which are fully or partially, out of the ambit of GST like power, real estate, petrol and diesel and fines for traffic violations. Any increase in tax at this juncture will prove to be counterproductive against the efforts of the central government which is trying to arrest the slowdown by extending a fiscal stimulus to the corporates to generate investment and ignite the cycle of employment and demand. Equally misplaced is the strategy of central government to provide fiscal stimulus to the corporates.

Ideally, the centre as well as the state governments should collectively follow the approach of unbalanced growth as propounded by economists like Hirschman and Singer which states that investment in selected industries or sectors would accelerate the pace of economic development. Mckinsey in one of its reports highlighted that there are 12 Indian states which contribute 50% to India’s GDP with 58% consuming class households. Similarly, there are 65 metropolitan districts which contribute towards 40% of GDP besides 49 clusters that contribute 70% to India’s GDP. Centre and state governments should cohesively try to identify such strategic sectors/areas where public investment should be made instead of hit and trial means to keep the cooperative federalism alive.

— The author is Associate Professor, Institute of Management, DAV College, Chandigarh

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