Punjab's Debt Crisis: Can the State Grow Out of Trouble?
Only through these disciplined measures can the state hope to extricate itself from its current financial quagmire and chart a path toward long-term prosperity.
Punjab Must Grow Out of Trouble
Punjab's fiscal health is precarious, with high debt levels edging towards unsustainable limits. While borrowing may seem unavoidable in the short term, the challenge lies in ensuring that borrowed funds are channelled into productive, growth-enhancing initiatives rather than wasted on non-essential expenses. Punjab's economy, once a leader in agricultural productivity, now faces turbulent financial times, further compounded by the end of the GST compensation from the centre, which provided much-needed relief from revenue shortfalls. With a cautious but strategic approach, Punjab could find a way to not only survive but thrive in the future1.
The Weight of Punjab’s Indebtedness
Punjab's current debt stands at a staggering ₹3.74 lakh crore, accounting for over 46% of its Gross State Domestic Product (GSDP). Critics warn that this figure could balloon to an alarming ₹5 lakh crore within a year if the state continues with its "business as usual" approach. Such high levels of borrowing have created a situation where debt servicing consumes a large portion of the state's revenue, leaving little room for developmental projects. To fund essential initiatives, further borrowing may be necessary, which risks pushing the state into a deeper debt trap. Despite these challenges, Punjab continues to seek higher borrowing limits from the central government to maintain fiscal stability.
The challenge isn't just about the size of the debt but its utility. Punjab needs to ensure that every rupee borrowed is deployed in ways that generate long-term benefits. Borrowing to fund unproductive expenditure will only push the state deeper into crisis.
The GST Cushion is Gone: A New Reality
One of the most significant blows to Punjab's fiscal position was the end of the Goods and Services Tax (GST) compensation scheme. For seven years, this compensation provided a crucial financial buffer, offsetting revenue shortfalls in the state's GST collections. With its cessation nationawide, Punjab now faces an unbudgeted shortfall estimated at ₹10,000 crore to ₹12,000 crore, leaving the state to manage its revenue deficits on its own. In response, the state government has submitted a comprehensive memorandum to the Central Finance Commission, requesting a ₹1 lakh crore revenue deficit grant. While the appeal is pressing, it remains uncertain whether this substantial sum will be sanctioned, given that the Finance Commission must operate within a framework applicable to all states and union territories2.
Mandi Board Borrowing: A Case in Point
The Punjab Mandi Board’s recent decision to borrow between ₹1,800 crore and ₹2,000 crore for the repair of rural roads highlights the state's ongoing reliance on borrowing to address critical infrastructure needs. Many of the 65,000 km of roads under the Board’s jurisdiction have been left unrepaired for several years, significantly hampering the agricultural economy, which depends on efficient rural connectivity.
Securing this loan, however, was not without its challenges. The Mandi Board faced reluctance from financial institutions, as banks demanded either high interest rates or government guarantees. After considerable difficulty, the National Bank for Agriculture and Rural Development (NABARD) stepped in, offering a loan at an interest rate of 8.3%, along with an 18-24 month moratorium period.
The Rural Development Fund (RDF) Imbroglio
Adding to the Board's financial woes is the central government’s suspension of Rural Development Fund (RDF) payments to Punjab since 2021, linked to the state's procurement of foodgrains, including wheat and paddy. Punjab is owed a staggering ₹5,850 crore in pending RDF dues, which were assessed under state law. This figure is expected to rise to ₹7,000 crore after the upcoming kharif harvest. The withholding of these funds has severely constrained Punjab’s ability to finance vital rural development projects, further exacerbating the state’s financial challenges.
To compound the financial strain is the repayment of loans taken by the previous administration for a farm debt waiver scheme, which further burdens the state’s coffers. The Mandi Board's financial crisis is symptomatic of the larger fiscal challenges Punjab faces, where central grants, such as the RDF, are withheld, leaving the state struggling to manage its financial obligations and maintain its infrastructure.
Other Borrowings: A Widening Fiscal Challenge
In addition to the Mandi Board loan, Punjab has been forced to borrow from other sources to meet its growing financial obligations. The state government has requested an additional borrowing limit of ₹10,000 crore from the central government for the current fiscal year, to cover its rising expenditure. This borrowing comes on top of the regular loans it takes to meet its financial commitments, which include salaries, pensions, and social welfare schemes. Furthermore, Punjab has been repaying older loans taken by previous administrations for schemes such as farm debt waivers, adding further strain to its finances.
While these borrowings temporarily ease the state's fiscal burden, they also create a situation where a significant chunk of revenue is redirected towards debt servicing. This reduces the funds available for development and growth initiatives, further complicating efforts to revive the economy. The growing debt load makes Punjab increasingly dependent on central government grants and borrowing, reducing its fiscal autonomy and narrowing its options for long-term financial stability.
Prudent Fiscal Management: The Only Way Forward
While borrowing is inevitable in the current situation, it must be accompanied by disciplined fiscal management. The government needs to focus on several critical areas to ensure that Punjab doesn’t drown under the weight of its debt:
Targeting Productive Investments: Borrowed funds must be used to invest in growth-oriented infrastructure projects, such as improving connectivity, modernising agriculture, and supporting industrial growth. Only by boosting its revenue-generating potential can the state hope to balance its books in the future.
Phasing Out Wasteful Subsidies: Punjab must reduce its reliance on wasteful subsidies and non-productive expenses. While social welfare schemes are essential, they need to be rationalised to ensure that only the truly needy benefit.
Enhancing Own Revenue Generation: The state must tap into its own resources, including improving tax compliance and boosting its share in non-tax revenues. The agricultural sector, while politically sensitive, could also contribute more through better resource management.
Collaborating with the Centre: While the state has urged the central government to grant it more fiscal leeway, especially post-GST compensation, collaboration with the Centre remains essential. Additional borrowing limits, grants, and financial aid must be part of a larger plan to rejuvenate Punjab's economy.
From Survival to Revival, and Finally to Thrival Mode
Punjab's economy has been stuck in survival mode for far too long. However, with the right policies, there is a real chance to move into revival and eventually into a thriving economy. This journey will require bold and strategic decisions that prioritise long-term growth over short-term political gains.
Punjab's future hinges on prudent fiscal management—balancing borrowings, curbing unnecessary expenditures, and focusing on generating sustainable revenue. Only through these disciplined measures can the state hope to extricate itself from its current financial quagmire and chart a path toward long-term prosperity. Expecting external intervention is unrealistic; no one from outside will come to Punjab’s rescue. Writing lengthy memoranda to the Government of India might temporarily create a narrative of bias against Punjab, but it will not provide a lasting solution to the state’s deep-rooted financial challenges.
