Punjab Government’s Hidden Contingent Liabilities
The spectre of devolving guarantees on loans raised by state boards and corporations.
About the Author
Karan Bir Singh Sidhu (MA Economics, University of Manchester) served nearly four decades in the Indian Administrative Service, retiring as Special Chief Secretary, Government of Punjab. He has held key fiscal posts—including Principal Secretary (Finance), Punjab—and now writes on public administration, fiscal federalism, and Sikh sociopolitical affairs.
Punjab Government’s Hidden Liabilities
1. A Contingent Mountain
With the current fiscal year projected to close with an outstanding debt nudging ₹4.17 lakh crore—the second-highest debt-to-GSDP ratio among major states, surpassed only by Kerala (timesofindia.indiatimes.com)—Punjab’s public finances are already on amber alert. Yet one indicator still slips beneath most fiscal radars: the mountain of government guarantees. These contingent pledges now stand at ₹31,122 crore, or roughly 3.8 % of GSDP (prsindia.org). A decade ago they were scarcely a third of today’s level, swelling in lock-step with the borrowings of more than forty state boards, corporations, and cooperatives. Should even a fraction of these entities falter, the “hidden” guarantees would crystallise into hard debt—catapulting Punjab’s liabilities far beyond an already over-stretched balance-sheet.
2. PSPCL — Anchor and Anchor Chain
2.1 Guaranteed Borrowings
Roughly 75 % of all guarantees back the loans and bonds of Punjab State Power Corporation Limited (PSPCL). The cover is “irrevocable and unconditional,” lowering PSPCL’s cost of capital but welding its fortunes to the treasury.
2.2 Quasi-Fiscal Overhang
Beyond guarantees, PSPCL is owed ₹10,000 crore in unpaid subsidies (current plus arrears) and ₹3,600 crore in electricity bills from government departments—₹13,600 crore in all. These arrears are not contingent; they are overdue cash outflows waiting to migrate onto the budget.
3. Infrastructure Boards and the Long Tail
Large slices of the guarantee pie lie with non-power entities as well:
Punjab Infrastructure Development Board (PIDB)—backed by state guarantees and a budgetary grant of ₹455 crore in FY 25, it disbursed over ₹1,000 crore to roads, urban amenities, and industrial-park projects last year.
Punjab State Civil Supplies Corporation—carries debt of roughly ₹12,900 crore for food-grain procurement and warehousing, much of it under state guarantee.
Markfed (Punjab State Co-operative Supply & Marketing Federation)—holds about ₹12,200 crore of guaranteed exposure tied to agro-marketing and processing operations.
Punjab Mandi Board—manages a multi-thousand-crore loan book for market yards and rural link roads, similarly buttressed by government backing.
A clutch of smaller agencies—Punjab Water Resources Management & Development Corporation, Punjab State Seed Corporation, PUNSUP, PAIC, and others—add dozens of mid-size guarantees that collectively deepen the State’s contingent risk profile.
4. When Guarantees Go Bad
The Punjab State Industrial Development Corporation (PSIDC) — once hailed for nurturing Punjab Tractors Limited, a shining example of how public sector undertakings (PSUs) ought to be run — eventually defaulted on ₹600 crore worth of state-guaranteed bonds after 2012. This compelled the state treasury to step in and honour the guarantee, in order to avert punitive sanctions by the Reserve Bank of India (RBI).
The Punjab State Cooperative Agricultural Development Bank (PSCADB) — the institutional backbone for long-term agricultural credit — was even more precariously placed. In financial year 2022–23, it required five separate bailout tranches amounting to ₹798 crore. These were necessary to stave off a default on refinance obligations to the National Bank for Agriculture and Rural Development (NABARD) and to clear long-pending pension arrears.
A breakdown in the PSCADB’s creditworthiness would have been catastrophic, not merely for the state’s fiscal health, but also politically and socially. It would have disrupted the village-level Primary Agricultural Cooperative Societies (PACS) network — the last-mile delivery mechanism for affordable farm credit. These societies serve as the only accessible and low-cost source of seasonal loans for many marginal and small farmers. Any default leading to stoppage of NABARD’s line of credit would have crippled this mechanism, particularly at a time when the farm economy is already teetering on the edge of crisis, burdened by spiralling indebtedness among both farmers and agricultural labourers.
Each such episode of default effectively transformed a contingent fiscal risk into a hard budgetary burden — eroding the government’s credibility, crowding out developmental expenditure, and consuming already scarce fiscal space.
5. The Guarantee Redemption Fund: A Leaky Umbrella
Punjab created a Guarantee Redemption Fund (GRF) in line with Finance-Commission guidance, but mandatory contributions (1 % upfront, 0.5 % annually to reach 5 %) have been chronically under-paid. Actual balances languish below 1 % of guarantees—far short of the buffer needed to absorb even a modest invocation.
6. Hidden Quasi-Fiscal Liabilities: Power-Subsidy Backlog
The burgeoning backlog of power subsidy payments in Punjab represents one of the most opaque yet crippling stress points on the state’s fiscal architecture. As of financial year 2024–25, annual power subsidy commitments have ballooned beyond ₹21,000 crore — an amount that far outstrips the state’s capacity to finance such support through regular budgetary allocations.
A closer look reveals that this burden is not theoretical but immediate and enforceable. Of the total, a shortfall of ₹4,500 crore remains unpaid for the current year alone, while unpaid dues from previous years cumulatively add another ₹5,500 crore. These are statutory obligations, not discretionary expenditures. That is, the state government is legally bound to honour them regardless of fiscal space or constraints imposed by debt-ceiling norms under the Fiscal Responsibility and Budget Management (FRBM) framework.
At the heart of the crisis lies a troubling contradiction. While the Punjab government continues to promise free or heavily subsidised electricity — to farmers, Scheduled Castes, Backward Classes, and economically weaker sections — it has persistently failed to make advance payments to the Punjab State Power Corporation Limited (PSPCL), now corporatised as Punjab State Power Utility (POWERCOM).
This is in direct contravention of Section 65 of the Electricity Act, 2003, which mandates that any subsidy announced by a state government must be paid in advance to the distribution utility. The Act clearly stipulates that electricity distribution companies (DISCOMs) are not to provide free or subsidised power unless the subsidy amount has been deposited by the government beforehand. Failure to do so is a breach of statutory responsibility.
Despite this clear legislative directive, the practice of delayed or non-payment has become institutionalised in Punjab. The Punjab State Electricity Regulatory Commission (PSERC) — ostensibly an independent statutory regulator — has turned a blind eye to this illegality. It continues to approve annual revenue requirements and power tariffs without enforcing the precondition of advance subsidy transfer, thereby indirectly facilitating this fiscal sleight of hand.
Meanwhile, POWERCOM is left in a precarious position. Starved of liquidity, it is forced to borrow heavily from commercial banks to bridge the working capital gap created by unpaid subsidies. Ironically, these borrowings are often backed by state government guarantees — deepening the very fiscal liabilities that the government ostensibly seeks to postpone or conceal.
This cycle creates a classic vicious loop of quasi-fiscal liabilities. The state delays subsidy payments; the utility borrows to stay afloat; the government guarantees these borrowings; the guarantees eventually convert into direct fiscal liabilities — all while headline deficit and debt figures are artificially contained. It is a textbook case of fiscal opacity.
Moreover, the scope for relief or correction is narrowing rapidly. With mounting interest liabilities, shrinking tax buoyancy, and politically sensitive expenditure heads already locked in, Punjab’s budget offers virtually no fiscal space to accommodate this growing power subsidy burden — whether for the agricultural sector, which remains politically sacrosanct, or for the economically and socially weaker sections, for whom such subsidies are a vital safety net.
Without radical policy correction — either by revising the subsidy regime, enforcing statutory compliance, or restructuring power-sector finances — Punjab faces the grim prospect of a full-blown solvency crisis in its energy ecosystem, with cascading effects on banks, governance credibility, and social equity.
7. Governance Gaps: Utilisation Certificates and Risk Pricing
Fresh Union-scheme instalments are stalling because ₹3,674 crore of utilisation certificates remain outstanding. Meanwhile, many guaranteed entities pay little or no guarantee fee, depriving the GRF of steady inflows and masking the true cost of risk. Transparent fee pricing and on-time UCs would both discipline borrowers and unlock withheld Union funds.
8. Strategy for Containment
Cap and Sunset Impose numerical caps and automatic sunset clauses on new guarantees, with cabinet-level approval for any breach.
Fund the GRF Divert a fixed share of stamp-duty windfalls and guarantee fees straight into the GRF until the 5 % target is met.
Targeted Subsidy Reform Phase farm-power subsidies into a direct-benefit format; link release of funds to PSPCL loss-reduction milestones.
Early-Warning Dashboard Monitor debt-service coverage, covenant breaches, and audit flags for every guaranteed entity in real time.
9. Cautious Optimism: A Narrow Window for Fiscal Redemption
The Finance Department of the Punjab Government, supported ably by a cadre of senior retired officers from the Indian Revenue Service (IRS), possesses the institutional capacity and technical acumen to steer the state back onto the path of fiscal rectitude. What is needed, however, is unambiguous political will from the highest levels of the state’s executive leadership. Without this top-down commitment, even the most well-crafted fiscal roadmap is likely to falter at the altar of populist expediency.
The path to recovery is admittedly difficult and demanding—laden with political risks and administrative complexities—but it is by no means intractable. The remedies are well known and readily available. These include:
Imposing prudent caps on contingent liabilities, especially government guarantees to loss-making entities;
Reactivating and adequately funding a dedicated Guarantee Redemption Fund (GRF) to meet such obligations without disrupting core budgetary flows;
Rationalising subsidy architecture by targeting benefits more precisely and enforcing statutory norms for timely payments;
Revising user charges and service fees, particularly in high-consumption sectors like power, transport, and urban services, to better reflect underlying costs.
Encouragingly, there are signs of a cyclical uptick in real estate activity, which is already translating into higher collections from stamp duties and registration fees. This short-term fiscal buoyancy provides Punjab with a narrow but critical window to rebuild fiscal buffers, strengthen its welfare delivery mechanisms, and reduce its vulnerability to future shocks.
If fiscal managers seize this opportunity with discipline and foresight, they can contain the state’s growing underbelly of hidden liabilities—such as off-budget borrowings, unpaid subsidies, and unfunded pension promises—before these risks metastasise into a full-blown crisis, one that could severely constrain policy choices ahead of the 2027 Assembly election cycle.
In essence, the clock is ticking. A credible and durable turnaround is still within reach, but only if action is swift, strategic, and politically backed. The costs of delay, by contrast, will be borne not just by the exchequer, but by the state’s most vulnerable communities—those who rely most on the very subsidies and safety nets now under threat.
Insightful.
The PSCADB is the branch of Cooperative structure that deals with Long Term Loans for farm assets. That's why this part is also known as Long-term coop credit structure. PACS deal in short and medium term loans which are sourced through DCCB and State Coop Bank (Short term Coop Credit Structure).