Imminent Economic Disaster: Why Punjab Is Another Sri Lanka In The Making

Unfortunately, in the recent months, after the Aam Aadmi Party (AAP) took over the reins of the state, the politics of Punjab has gone down a path where economic thinking and planning is a distant priority.

Today, the state battles separatism and consequent law and order issues with a hapless Chief Minister watching on.

The Member of Parliament from Sangrur, once AAP’s only Lok Sabha seat, is today openly calling for Australia to recognise Sikhs as a separate nationality while a new separatist leader, guarded by armed men, has emerged out of nowhere. 

None of it, however, takes away from the deep economic mess the state of Punjab is in.

Only recently, one of the most absurd suggestions in the economic history of India was proposed by three economists from Punjabi University, Patiala.

In their opinion, the AAP government should consider turning to generous Punjabis, worldwide, who can contribute to decrease the state debt, currently in the neighbourhood of Rs 2.5 lakh crore.

Now, with the budget session finally underway, another bombshell has been delivered by the CAG. 

The State Finances Audit Report of the Comptroller and Auditor General (CAG) of India for the financial year ending in March 2022 was presented in the state legislature earlier this week.

The economic revelations, especially the ones pertaining to the debt of the state, are alarming.

As per the CAG report, if the state financial trajectory continues in the same manner as it has been for the last few years, by the end of 2032, the state could be staring at a debt of Rs 5 lakh crore. Beyond the numbers, however, there are other concerning observations. 

As a percentage of the Gross State Domestic Product (GSDP), Punjab’s debt has gone from 41.43 per cent in 2017-18, 41.35 per cent in 2018-19, 42.71 per cent in 2019-20, 46.88 per cent in 2020-21, to 44.74 per cent in 2021-22.

In absolute numbers, the debt has increased from Rs 1.95 lakh crore in 2017-18 to Rs 2.6 lakh crore in 2021-22. Of the total debt, only 2 per cent is made up of loans from the Government of India, while more than 84 per cent is internal debt alone. The rest is Public Account Liabilities. 

The state has mounting debt that must be repaid in the coming years. Factoring in the interest payments, the total public debt, to be settled over a period of not more than ten years, stands at Rs 3.6 lakh crore.

More than 50 per cent of that debt is payable over the next seven years, while the long-term debt, to be paid between the seventh and the tenth year, is around Rs 1.54 lakh crore.

Put simply, if the next five years appear tough for the state with respect to public debt management, the next five after are going to be punishing in every way. 

The Debt Problem Is Aggravated By Two Reasons.

One, while the state is paying off some of its debt, it is also taking over more to finance both debt payments and capital expenditure, thus trapping itself in a vicious cycle.

For instance, in 2017-18, against Rs 7,152 crore internal debt repaid, Rs 18,057 crore was borrowed. In 2020-21, against Rs 12,863 crore repaid internal debt, Rs 33,595 crore was borrowed.

In 2021-22, Rs 16,781 crore was paid as internal debt, and Rs 26,584 crore was borrowed. Most internal debt is composed of loans from the market. 

Thus, in the last five years, the annual borrowings by the state government have been focussed towards repayments. In 2017-18, 73 per cent of the total borrowings were directed towards the repayment of principal.

For the next four years, the percentage hovered around 70 per cent before coming down to 59 per cent in 2021-22.

The capital expenditure has therefore taken a hit, with three of the five years witnessing less than 10 per cent of the total borrowings being used for capital expenditure. 

Two, the CAG estimates that given the debt trap the state government is in, over the next ten years, it would have to borrow more. Factoring in the past trends, the CAG estimates that by the end of 2031-21, the state’s debt could breach Rs 5.14 lakh crore.

The problem is that the state government, instead of focussing on indulging the private sector are too busy squandering away resources on subsidies and freebies.

Further, the political climate dents private sector investment that could create both revenue and employment. 

Even the majority expenditure of the state is directed towards debt obligations or fixed costs, like wages and pensions. Subsidies and interest payments are responsible for one-third of the expenditure, while wages and pensions take away another one-third of the pie.

Power subsidy, allotted to rich farmers, makes up for at least two-thirds of the subsidies.

Further, the state government did not invest the funds allotted to the state disaster relief fund, was incurring loses over investments in corporations, and losing money to incomplete infrastructure projects. 

Punjab’s Economic Situation Resembles That Of Sri Lanka For Multiple Reasons.

One, quite like Sri Lanka, Punjab is caught in a debt trap where they are dependent on the market loans (bonds, etc). While the payments may appear feasible in the initial years, they will only pile up as the time goes on.

Two, the state is indulging in economic wokeism, rejecting private investment in agriculture, one of its strongholds, quite like Sri Lanka that ushered naive experiments like banning synthetic fertilizers. 

The island nation was also guilty of allowing tax cuts, resulting in reduced income for the government.

AAP, while not responsible, entirely, for the economic mess the state is in, misused its strong mandate for change and went a step further offering freebies.

The upcoming budget, given the elections next year, may have more such offerings in the name of welfare. However, in the long run, it will only damage the state’s debt profile.

Unlike Sri Lanka, Punjab will not have to worry about inflation at a macro level, but fundamental problems remain. 

Compared to other states in India, Punjab’s liabilities, as a percentage of the GSDP, are the worst.

As per the recent Reserve Bank of India (RBI) report on state’s finances, Punjab, in 2021, was the worst performing state, only behind Mizoram and Nagaland, the north-eastern states constrained by an array of factors.

Be it the neighbouring states of Haryana and Himachal Pradesh, or the bigger states like Gujarat, Karnataka, and Tamil Nadu, none of them are nowhere near to the mess Punjab finds itself in. Concerning, yes, but even West Bengal is relatively better. 

For Punjab, the equation is quite simple.

In the narrow window, of around three to four years, they must get their act together through more room for private investment, participation of corporations in agriculture, industry, and manufacturing, and doubling down on law and order issues, corruption, and lack of infrastructure.

Ideally, the AAP with all its promises should have already embarked on this path, and even though the problem has its origins in history with every government of the past being responsible, the onus lies with AAP. 

However, if AAP’s previous budgets are any indication, they are perhaps the worst possible selection for this herculean economic task. 

An imminent economic disaster.