Chander Mohan Kohli
The Debt-to-GDP ratio is a fundamental economic metric for assessing the ability of a state to manage its debt burden and create tools for calibration of its economic wellbeing. It is calculated by dividing the total outstanding with the Gross Domestic Product (GDP) and multiplying the same by 100. It also reflects the specific financial situation of the state and its policies. It also influences credit ratings, budgetary decisions, and fiscal strategies of the state.
Punjab has accumulated debt of over Rs. 47000 crores in the financial year 2022-23, to add to its earlier burden of almost Rs. 3 Lakh crores. The projected Debt-to-GDP ratio comes to 46.8 % on a projected GSDP of 6.98 Lakh crores.
RBI has strongly conveyed to Punjab that its outstanding debt is increasing too fast and a very alarming economic situation is in the making. Under the circumstances, it would be desirable for the state government to plan a strong roadmap to come out of the burgeoning crisis.
How has a rich and prosperous state like Punjab, which used to be the food basket of the country and number one in economic indicators, has come to such a sad situation?
Punjab witnessed a debilitating environment of militancy starting from the 1980s and lasting for more than a decade. This turmoil disrupted the development process as both the central and state governments remained pre-occupied in containing the serious law and order situation and all other institutions fell to disarray. When terrorism was at its peak the state was compelled to resort to heavy borrowing to control the situation.
The state has, subsequently, witnessed three decades of peaceful governance by successive elected governments but they could not trigger a revival due to corruption, mis-governance and malpractices. The result is that the state has shed its revenue surplus status and degenerated to becoming revenue deficit. Now the danger of falling into a debt trap is looming over the state. Fiscal policy, the most dynamic instrument of development has become dysfunctional.
Dr. Ranjit Singh Ghuman, a Professor at Guru Nanak Dev University, Amritsar, while discussing the matter of fiscal policy has said that the government should provide a rationale for its populist programs considering that it has a debt far exceeding its revenue receipts.
A learned economist, Dr. Lakhwinder Singh too has stated that successive governments of Punjab have been inconsistent in application of a development oriented fiscal policy which has made the state dysfunctional over time. The state government does not have any financial resources for fresh capital expenditure. The borrowed amounts are paid towards accumulated interest liability over the years.
On 04 December 2022, the Hindu newspaper expressed concern that Punjab has turned from a debt stressed to a debt trapped state. Indian Express dated 05 October, 2023 stated that in the last 20 years’ debt in Punjab has risen almost by a multiple of ten, putting immense stress on the state’s finances. RBI has strongly conveyed that Punjab’s outstanding debt is around 50% of GDP which is almost four times higher than its revenue in FY 2022-23. The government needs to prepare a new road map for development.
Sadly, the present government led by AAP has failed to unveil any program to contain the mounting debt and rejuvenate the state’s economy. The marginal rise in the revenue goes towards meeting new subsidies even as the state’s financial situation continues to remain in the state of flux.
The Politics of Populism
Loan waivers, smart phones with free data & calling, free bus travelling facility for students and ladies, free power to domestic consumers & farmers, free medical care, all join together to create a rain of freebies in Punjab. Be it Shiromani Akali Dal (SAD), Congress or AAP, all have indulged in a vote centric populist streak, by promising doles, concessions and waivers for catching votes of the vulnerable sections of society. The poll players indulge in competitive populism to outdo each other.
The APP has taken a new dimension of populism in wooing voters of all sections of the society. Its efforts have resulted in grabbing of the reins of the state. Now it is indulging in uncontrolled borrowing to make good at least some of its promises and thus stay politically afloat. Public money is taxpayer’s money, its excessive diversion with the objective of securing favors drains the resources leading to higher taxes and debt burden.
Why did Punjab see an increase in the Debt-to-GDP Ratio?
There are multiple reasons for this, some of which are enumerated below:
- The unprecedented tide of generosity defies all economic logic in a state burdened with a very heavy debt liability. The cost of freebies and subsidies is unsustainable, for which reason, no political party has ever given cost of the concessions announced, which ultimately is borne by the state exchequer without any planning on sources.
- Spending on infrastructure development, social welfare programs and public services constitutes good expenditure but it has to accrue returns in the long run to pay off the debt. Such a consequence has not been witnessed in Punjab, where the debt keeps rising with no complementary increase in revenue.
- A cut in grants and contributions by the Union government further complicates development schemes of a cash strapped state. This has been done in Punjab by the center (to an extent) because successive state governments have been diverting funds to non-essential populist projects, which is not allowed in the use of government resources and causes audit problems with the Comptroller and Auditor General (CAG), in turn, stalling the further release of funds.
The poor fiscal health of Punjab calls for deep analysis and strategic intervention. A piecemeal approach is no solution, it in fact, complicates the problem. Public debt, committed expenditure, welfare budget and spending on freebies, goods & services all have tremendously increased while capital expenditure remains very low. The state government has failed to discharge its financial liability, instead, it is increasing borrowing at an unprecedented and dangerous pace which is hurtling the state into a debt trap. This has pushed the growth to extremely low levels.
The revenue deficit is widening from year from year. For example, the deficit in the first half of the fiscal year has grown from RS. 11464.98 crores in 2022 to Rs. 18938.11 crores in 2023. The government has very meagre resources to spend on capital creation or even for its maintenance.
Debt Sustainability & Management
Debt sustainability refers to ability of the government to prepare a roadmap to improve the Debt-to-GDP ratio. The followings are few suggestions:
- Fiscal Discipline – The State should reduce budget deficits to curtail debt accumulation.
- Revenue Enhancement – Boost revenue through an effective taxation policies & proper collection mechanism. It must also check evasions & tighten all loopholes.
- Prudent Borrowing – Implement responsible policies.
- Debt restructuring – Refinance the existing debt to lower interest rates.
- Economic Growth – Invest in productive sectors to stimulate GDP growth.
- Enhanced Credit Worthiness – Implement programs to promote ease of doing business.
- Lower Borrowing Costs – Resulting into lower interest Cost.
- Sustainable Finances – Ensuring long term fiscal stability.
Conclusion
The fiscal situation in Punjab is critical but not irreversible. It is so because the state has a tremendous capacity for hard work and entrepreneurship. It also has fertile lands and ample natural resources. These advantages can be leveraged to engineer a quick turnaround.
The need of the hour is good, honest leadership that keeps the interest of the state above politics, has the capacity to present the grim facts to the people and garner their support to bring about the necessary change. Such a situation is easier said than done since the leadership across the board is not showing the qualities to usher such a drastic change, things are likely to get much worse before they begin to turnaround.
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