Punjab: Plunging into Penury from the Peak of Prosperity

The state leadership faces a stark choice: accept the political costs of necessary reforms today, or preside over the economic devastation that fiscal collapse will inevitably bring tomorrow.

About the Author

KBS Sidhu is a retired Indian Administrative Service (IAS) officer of the 1984 batch with nearly four decades of experience, having served as Special Chief Secretary and Principal Secretary, Finance, Government of Punjab. He holds an MA in Economics from the University of Manchester, UK. He writes extensively on fiscal policy, revenue mobilisation, managerial efficiency, political expediency, and the challenges of fiscal federalism.

Punjab's GST Performance vs. Debt Trap: A Chronicle of Fiscal Deterioration

The Narrow Path Between False Hope and Financial Collapse

Punjab finds itself ensnared in a fiscal death spiral where even its strongest revenue performance—a commendable 16.4% compound annual growth rate in GST collections since 2017—cannot outpace the relentless expansion of its debt obligations. While GST revenue has doubled from ₹9,649 crore in 2017–18 to ₹19,415 crore by January 2025, this achievement is overshadowed by the state's outstanding debt, which has surged from ₹1.96 lakh crore to an estimated ₹3.74 lakh crore by 2024–25. The mathematics are unforgiving: a 10% debt CAGR against nominal GSDP growth of roughly 9% ensures the debt-to-GSDP ratio remains anchored near 45%, breaching Punjab's own FRBM roadmap limit of 40%.

The GST Mirage: Strong Collections, Weakening Foundation

Punjab’s GST performance, though impressive on paper, reveals deep structural vulnerabilities that underscore the relative hollowness of cosmetic fiscal celebrations. The state’s recent milestone of ₹2,654 crore in April 2025—its highest-ever monthly GST collection, reflecting a 19.77% increase over April 2024—masks the uncomfortable reality that GST revenue growth, even after outpacing inflation by roughly 11% in real terms, remains insufficient to service the state’s ballooning interest obligations.

The end of GST compensation in June 2022 has stripped away Punjab's fiscal safety net. Having received ₹46,051 crore as GST compensation between 2017–18 and 2022–23, the state now faces the harsh reality of generating revenue without central safety-net. The compensation represented over 40% of SGST revenue in 2019–20, highlighting Punjab's dangerous dependence on federal transfers, linked to the GST transition, that no longer exist.

The Debt Noose Tightens: Interest Payments Consuming the State

Punjab's interest burden has evolved from a fiscal constraint to an existential threat. Interest payments have grown from ₹15,334 crore in 2017–18 to ₹23,900 crore in 2024–25, representing a 6.5% CAGR that, while slower than debt growth, still consumes approximately 23% of all revenue receipts. This committed expenditure, combined with salaries and pensions, will claim 76% of revenue in 2024–25, leaving precious little room for development spending or economic diversification.

The Centre’s recent decision to slash Punjab’s open market borrowing limit by ₹16,676 crore signals the Union Finance Ministry’s recognition of the state’s unsustainable fiscal trajectory. With Punjab requesting ₹47,076 crore borrowing limit but receiving approval for only ₹21,905 crore, the state faces a brutal reckoning with its spending priorities.

The Subsidy Trap: Electricity as Fiscal Poison

Punjab’s electricity subsidy represents the most destructive element of its fiscal architecture. The power subsidy bill has crossed ₹24,000 crore for the current fiscal year, exceeding the state’s entire revenue deficit and consuming resources that could finance productive investments. The Punjab State Power Corporation Limited (PSPCL) alone accounts for losses of ₹4,775.93 crore in 2022–23, transforming from a public utility into a fiscal vampire that drains state resources.

The subsidy structure incentivizes grotesque inefficiencies. Large farmers with multiple connections capture disproportionate benefits while small farmers receive minimal direct advantage. The policy encourages reckless groundwater extraction—Punjab now extracts 165% of its renewable groundwater resources—creating an environmental catastrophe alongside fiscal devastation.

The existing legislative provisions in the central law requiring quarterly advance subsidy payments have exposed the unsustainability of Punjab’s electricity largesse. The state’s inability to meet these advance payment requirements threatens to collapse the entire subsidized power infrastructure, potentially triggering mass civil unrest.

PSU Hemorrhaging: The Hidden Fiscal Cancer

Punjab’s Public Sector Undertakings represent a catastrophic drain on state resources, with losses increasing six-fold from ₹724.59 crore in 2018–19 to ₹4,809.75 crore in 2022–23. These entities collectively generate a pathetic 0.02% return on investment, far below the state’s borrowing costs, creating a perverse cycle where Punjab borrows money to fund loss-making enterprises.

The state maintains 33 working PSUs, most operating as employment schemes rather than commercial enterprises. Punjab State Civil Supplies Corporation Limited leads the loss parade with ₹995.78 crore in losses, followed by Punjab State Grains Procurement Corporation Limited at ₹733.91 crore. These losses stem from operational inefficiencies, corruption, and political interference that make genuine commercial operations impossible.

Government Guarantees: The Ticking Time Bomb

Punjab’s Government guarantees of ₹31,122 crore represent a hidden debt mountain that could crystallize into hard liabilities at any moment. These guarantees, primarily backing PSPCL’s borrowings, create an irrevocable financial commitment that links the utility’s commercial failures directly to the state’s fiscal health.

The guarantee structure lacks proper risk assessment or collateral backing. Punjab has been standing guarantees for loans indiscriminately and without assessing the repayment capability of borrowing entities. Should even a fraction of these guaranteed entities default, Punjab’s already precarious debt position would deteriorate catastrophically.

The Reform Imperative: Systemic Overhaul, Not Cosmetic Changes

Punjab’s fiscal crisis demands fundamental restructuring, not the incremental adjustments that have characterized past "reform" efforts. Cosmetic measures—marginal tax increases, minor expenditure cuts, administrative efficiency drives—will prove utterly inadequate against the scale of structural dysfunction.

Electricity Subsidy Phase-Out: The Essential Starting Point

Punjab must implement a three-year electricity subsidy phase-out, replacing blanket subsidies with targeted direct benefit transfers. The current system, which provides free power to 1.4 million tubewells, represents regressive wealth transfer disguised as farmer welfare. A credible alternative involves halving the power subsidy over three years and redirecting savings toward productive agricultural investments in crop diversification and water conservation.

Direct benefit transfers, based on land holdings and income verification, would eliminate the current system’s perverse incentives while maintaining support for genuinely needy farmers. This approach would reduce groundwater depletion, improve PSPCL’s commercial viability, and free up fiscal resources for development spending.

PSU Privatization: Eliminating Fiscal Hemorrhaging

Punjab must aggressively privatize or liquidate all PSUs that do not serve core government functions. The state has no business operating grain procurement corporations, civil supplies companies, or industrial enterprises that consistently generate losses. These entities should be sold to private buyers or, where no buyers exist, wound up entirely.

PSPCL’s distribution network represents a prime privatization candidate. The Chandigarh model, where private distribution companies operate under regulatory oversight, offers a template for reducing fiscal exposure while maintaining service quality. Punjab should privatize at least 50% of PSPCL’s distribution operations within three years, using proceeds to reduce debt.

Expenditure Rationalization: Cutting Government to Size

Punjab must slash non-essential government functions and reduce the public sector’s footprint across multiple domains. This includes:

• Administrative consolidation: Merging duplicate departments and eliminating redundant positions

• Social scheme rationalization: Replacing multiple welfare programs with a single direct cash transfer system

• Infrastructure prioritization: Completing existing projects before initiating new ones

• Salary and pension reform: Implementing market-based compensation and transitioning to defined contribution pension schemes

The state should target a 20% reduction in non-development expenditure over three years, eliminating departments that duplicate central government functions or provide services better delivered by private markets.

Central Finance Commission Expectations: Pleading from Weakness

Punjab’s demands from the 16th Finance Commission—₹1.32 lakh crore in special assistance and an increase in states’ share of central taxes from 41% to 50%—reflect the desperation of a fiscally super-stressed state seeking federal bailouts rather than implementing necessary reforms. While these demands may secure marginal relief, they cannot address Punjab’s fundamental structural problems.

The Finance Commission is unlikely to reward fiscal profligacy with increased transfers. Punjab’s debt-to-GSDP ratio of 46.6% places it among India’s most fiscally vulnerable if not irresponsible states, making it an unlikely candidate for preferential treatment. The state’s emphasis on historical contributions to food security, while emotionally resonant, cannot override current fiscal realities.

The continuation of the Post Devolution Revenue Deficit Grant, which provided ₹25,968 crore over five years, remains only a very remote possibility. The Centre increasingly demands fiscal discipline as a precondition for assistance, requiring Punjab to demonstrate credible reform implementation before receiving additional support.

The Narrow Window for Cautious Optimism

Punjab retains limited opportunities for fiscal recovery, contingent on implementing comprehensive structural reforms rather than pursuing incremental adjustments. The state’s agricultural productivity, strategic location, and entrepreneurial diaspora provide foundations for economic revitalization—but only if accompanied by radical fiscal restructuring.

Recent improvements in GST compliance and collection efficiency demonstrate Punjab’s latent revenue potential. The addition of 46,338 new taxpayers in 2023–24 and improved filing rates suggest scope for further revenue enhancement through administrative modernization.

However, this optimism must remain heavily qualified. Punjab’s fiscal mathematics allow no room for half-measures or political compromise. The state faces a binary choice: implement comprehensive reforms that eliminate subsidy culture and reduce government overreach, or accept inevitable fiscal collapse leading to federal intervention.

Peering Ahead: Reform or Ruin

Punjab’s fiscal trajectory offers a sobering lesson in the consequences of populist politics and structural denial. Despite commendable GST revenue growth, the state’s debt burden continues expanding faster than its economic base, creating an unsustainable dynamic that threatens long-term viability.

The path forward requires abandoning the subsidy-dependent economic model that has dominated Punjab’s political economy for three decades. Electricity subsidies must be phased out, loss-making PSUs privatized or liquidated, and government functions rationalized to eliminate non-essential spending. These reforms will prove politically painful but represent the only alternative to fiscal collapse.

The window for voluntary reform is rapidly closing. Centre’s patience with Punjab’s fiscal profligacy is veering thin, as evidenced by reduced borrowing limits and skeptical responses to aid requests. Without immediate implementation of comprehensive structural reforms, Punjab risks becoming a cautionary tale of how short-term political expediency can destroy long-term economic prosperity.

The state leadership faces a stark choice: accept the political costs of necessary reforms today, or preside over the economic devastation that fiscal collapse will inevitably bring tomorrow. Half-measures and cosmetic adjustments will no longer suffice. Punjab’s survival as a financially viable state depends on the courage to make fundamental changes that previous governments have consistently avoided—lest debt trap becomes a virtual death trap.

UPDATE (1st July, 2025)

Q2 Borrowings in FY 2025–26: Punjab to Raise ₹8,500 Crore Amid Deepening Debt Spiral

Punjab’s debt trajectory continues its alarming ascent with the Reserve Bank of India (RBI) approving the state government’s plan to borrow an additional ₹8,500 crore over the three-month period from July to September 2025. This fresh borrowing adds further strain to an already overstretched fiscal balance sheet. As of March 31, 2025, Punjab’s total outstanding debt had reached ₹3.82 lakh crore—equivalent to over 44% of the state’s Gross Domestic Product (GDP). Projections indicate that by March 31, 2026, the debt burden will breach the ₹4 lakh crore mark, translating into a per capita debt exceeding ₹1.25 lakh for every Punjabi.

The loan schedule begins with borrowings of ₹500 crore each on July 8, July 15, July 22, and July 29. In August, the state plans to raise ₹1,500 crore on August 5, ₹1,000 crore on August 12, and ₹500 crore on August 19. September borrowings will include ₹1,500 crore on September 2, ₹500 crore on September 9, ₹500 crore on September 23, and ₹1,000 crore on September 30.

This aggressive borrowing schedule reflects Punjab’s growing dependence on debt to finance routine revenue expenses rather than development or asset-creating investments—deepening a cycle where fresh loans are increasingly used to service old ones, not to build fiscal capacity or economic resilience. The RBI has recently cut benchmark interest rates aggressively by 0.5%, and it will be interesting to see whether this reduction is proportionately reflected in the borrowing costs of Punjab government loans. In the absence of bold structural reforms, the fiscal slide will only accelerate from here, which has been the theme of our previous articles.