Resurrecting Punjab’s economy

  • Lakhwinder Singh, Hindustan Times
  • Updated: Apr 06, 2015 13:19 IST

From 1992 to 2012, Punjab’s economy grew at the rate of 5.6% per annum, lower than India’s overall growth rate of 6.9% and also low among the country’s dynamic states. Punjab is seventh among the states both in terms of per capita income and growth rate. Consequently, the contribution of Punjab’s economy to the national income has declined from 4% to 3%. The relative marginalisation of Punjab has been continuous.

If this trend is not arrested, then in the foreseeable future, that is, by 2025, it will occupy the bottom rank among the states.

Economic prosperity, political power, social pride and dominance are interconnected. Declining economic prosperity in Punjab has consequences far and wide for Punjabis living in India and other parts of the world. In the national policymaking space, Punjab is considered as a basket case and states such as Gujarat, Haryana, Maharashtra, Tamil Nadu, Kerala and Himachal Pradesh are projected as the future engines of economic growth and development.


Why has Punjab’s economy fallen far behind? There are several factors that had contributed to the regression. Among the explanatory factors, the predominant one underlined by Nobel Prize-winning economist Douglas North is the dysfunctionality of institutions. The effectiveness of public policy is highly dependent on a conducive environment provided by institutional arrangements. For the past three-and-a-half decades, Punjab suffered heavily on this count. The result is the decline of economic governance and the failure of economic policy as well as delivery of economic services. The distrust between the political elite and the business elite has reduced investment yet to happen in the state. The distrust is further perpetuated by the high degree of ‘rent-seeking’ behaviour, which derailed the process of economic development.


During the 2014 parliamentary elections, Punjab’s ruling alliance raised high hopes regarding a ‘magic solution’ to the state’s economic and financial vows through the National Democratic Alliance (NDA), if voted to power. Immediately after the elections, the state government hastily put forward before the newly-elected NDA government financial demands in the form of various packages. However, two letters from the Union ministry of finance cleared the air and dashed the hopes generated by the Punjab government. These two letters not only revealed the favour done by the previous (UPA) government but also put the onus for the blame on the state government for the misgovernance and financial mess.

Since then, there is a feeling of strain within the ruling alliance. The game plan seems to have been changed so much that each is drawing new strategies to deal with the new situation if the alliance falls apart. The attempt to revive the traditional (Panthic) agenda by the Shiromani Akali Dal (SAD) is a dangerous game plan that is emerging on the scene. This is a reactionary response which will neither be in the interest of Punjab nor of the SAD.


Instead, the state government, in the remaining two years of its term, has the option of acting intelligently and devising a smart strategy to revive economic development in the state. The first step the government can take is to shed the baggage of rent-seeking behaviour and restore the confidence of investors. This will serve as a signal to the investors that the government means business and business can flourish without the protection and patronage of the ruling elite. The second step can be to collect taxes to the full extent; rampant tax evasion should be curbed.

This will help the state realise legitimate tax revenue and will provide the government the necessary capability to direct economic activities in the desired direction. The rationalisation of expenditure from non-productive use to productive use will allow further to restore the confidence of the economic agents of production. The discretion of distribution of grants to secure political patronage should be done away with.


These two steps have the capacity to liberate the fiscal policy from its stage of dysfunctionality to a dynamic and vibrant instrument of public policy. The composition of the state domestic product has changed over the period of time. Therefore, it is rational and legitimate that appropriate new taxes be imposed on new economic activities. It is naive on the part of any government not to change its tax structure with the change of the composition of output of its economy.

If there are positive signals, the state government can take up the case of relief from the Union government as suggested by the 13th Finance Commission for debt-stressed states (Punjab is one of them). Having done the minimum desired from the well-functioning government, no one can deny Punjab its legitimate due.

People of Punjab are proud of Guru Gobind Singh’s supreme sacrifice for a cause. Now it is high time for the political elite to show the magnanimity to follow the high tradition set by our great guru for the sake of Punjab.

(The writer is a professor of economics and director, Centre for Development Economics and Innovation Studies (CDEIS), at Punjabi University, Patiala. The views expressed are personal.)

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