Managing State Finances: Punjab Struggles With High Debt, Revenue Plunge
A farmer harvests a wheat crop. (Photographer: Asad Zaidi/Bloomberg)

Managing State Finances: Punjab Struggles With High Debt, Revenue Plunge

The slowdown in state tax revenue and reduced transfers from the central government has forced the North Indian state of Punjab to cut spending across a number of new projects and schemes. So dire is the situation that the state even had to stagger salary payments last month, said Punjab Finance Minister Manpreet Singh Badal in an interview to BloombergQuint.

Tax collections are lower by 10-15 percent compared to the budget estimates, Badal said. “Not only in terms of the tax that we had budgeted for but also in terms of the grant from the Government of India and the devolution which comes from the centre,” Badal said. “Even though Punjab is a very small state, almost Rs 1,500 crore of less tax is coming in than what had budgeted for.”

Badal echoes the sentiment of a number of state finance ministers. Weaker tax revenues, lower and, sometimes delayed, transfers from the central government have made the management of state finances tougher in 2019-20. The result is lesser room for spending when the economy is already under pressure.

While the combined fiscal deficit of states was expected to settle at 2.6 percent during the current year, the target now seems out of reach. State deficits may hit 3 percent this year, estimated India Ratings and Research in a report earlier this month.

In Punjab, the government is trying to keep the deficit in check, said Badal, adding that the negative consequences of that are being felt across the state. The state had budgeted for a fiscal deficit of 3.4 percent.

We will try and stick to our fiscal parameters. But that would mean that there would be less spending and less growth for the state. Almost 60 percent of all welfare activities, which are taken by governments are actually taken up by the state governments. The state government is responsible for education, health, agriculture, running of canals, social security, policing, etc. If you have less money, then you have less money to spend on the welfare of the people and also consequently, the growth of the state.
Manpreet Singh Badal, Finance Minister, Punjab

Badal, who joined finance ministers of states like Delhi, West Bengal and Kerala, in protesting the delays in central transfers, particularly of GST compensation cess, compares the situation to a ‘sovereign default’.

“Not being able to get paid and in time almost amounts to a sovereign default. This is a constitutional obligation. We had trusted the Union of India when we subsumed our taxes, when we surrendered our financial sovereignty to the Government of India. But not being paid on time and not even been given a satisfactory answer, I think that it is unfair,” Badal said.

Unsustainable Subsidy Burden

That’s not to say that states are not to blame for the current situation that many of them find themselves in.

In Punjab, for instance, large power subsidies are doled out to farmers, along with industrial and domestic consumers. In 2019-20, the state allocated Rs 8,969 crore for subsidised power for farmers. Another Rs 1,513 crore and Rs 1,916 crore was allocated for power subsides to industries and domestic consumers.

That took the total power subsidy bill to Rs 12,398 crore.

Will a tough fiscal situation together with mounting debt force a change in state’s thinking on subsidies? Badal, candidly, admits that the political repercussions of removing farm subsidies may be too much for any government.

As someone who anxiously and every day reflects on the future of Punjab, this is an exercise that we engage in every month but removing subsidies from the farmers of Punjab is almost like the Kashmir question. We can debate it and all, but it is very difficult to settle it. With such a large population engaged in agriculture and very successful agriculture, I am not sure many governments would have the political guts to actually deal with the fallout of this decision.
Manpreet Singh Badal, Finance Minister, Punjab

In addition to already high spend on subsidies, the state also took on the burden of a farm loan waiver. It announced a Rs 10,000-crore farm loan waiver, of which, Rs 3,000 crore is budgeted to be spent in 2019-20.

The high spends have meant that Punjab has a revenue deficit of 2 percent of gross state domestic product— the second highest across Indian states after Rajasthan.

Punjab’s Debt Binge

Punjab is also India’s most indebted state with debt-gross state domestic product ratio of 40 percent. Interest payments, budgeted at Rs 17,669 crore in 2019-20, make up over 22.5 percent of the state’s revenue receipts.

Historically, Punjab has had among the highest debt ratios, which Badal attributes to historical baggage, including a long period of insurgency. Still, the state did manage to bring down its debt-gross state domestic product ratio to below 40 percent between 2008 and 2016.

Badal said the answer lies in promoting investment in the state, which will raise economic activity and the state domestic product. His government, Badal claimed, is making an effort to do just that.

We are trying to get investments in Punjab and trying to increase the GSDP of the state. I am very happy to report to your listeners that in the last three years, almost Rs 55,000 crore of investments have actually been grounded in the state of Punjab.
Manpreet Singh Badal, Finance Minister, Punjab

“Whatever it takes, Punjab is going to be progressed. Willingly, if possible, but kicking and screaming if required,” Badal said.

Watch the full interview with Punjab Finance Minister Manpreet Singh Badal here...

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