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Financial Package for Punjab: State needs governance fix, not fiscal fix

Financial package for Punjab has to be located in the nature of Centre-state relations. Its utilisation has to be analysed in relation to the prevalent governance vision, economic and social development priorities and fiscal discipline. Its outcome has to be measured in terms of its capacity to enhance access of marginalised population to the social security net, education, public health facilities and safety and security apparatus.

chandigarh Updated: Jun 17, 2015 12:59 IST
Financial package for Punjab,Indian Constitution,Centre-State Relation Commission

Financial package for Punjab has to be located in the nature of Centre-state relations. Its utilisation has to be analysed in relation to the prevalent governance vision, economic and social development priorities and fiscal discipline. Its outcome has to be measured in terms of its capacity to enhance access of marginalised population to the social security net, education, public health facilities and safety and security apparatus.

The legitimate question arises: Will this package alter the existing nature of market-oriented distributive justice framework? The answer is no. The financial package can only help correct the distortions in the federal structure and in the existing delivery mechanisms without altering the thrust of liberalisation and privatisation growth paradigm.

India is a multicultural, ethnic, linguistic and religious society. The plural character of the Indian society and the dynamic nature of the Indian Constitution along with the fast changing socio-economic and political reality have provided a dynamic basis to the Centre-state relations. Federalism, according to the Centre-State Relation Commission is not a static paradigm, it is a changing notion.


Let me attempt to characterise the changing context of the Centre-state relations. With the emergence of coalition politics, it was assumed that with regional groups having acquired greater stakes in politics, it would be able to reverse the trend of over-centralisation nurtured by single-party dominance since Independence. Greater access of the regional parties to political power has in fact transformed the content of federalism from anti-centre to cooperative federalism and, in practice, bargaining federalism. It would not be wrong if we argue that the present political dispensation in the state has relatively reduced the bargaining capacity. Further, being a small state with only 13 members of Parliament (MP), Punjab's capacity to influence policies at the Centre is rather limited. That's why it doesn't have a bargaining advantage that other states have.


Further, the trend of globalisation has transformed the terms of discourse between the Centre and states. The nation has surrendered to the market in the sphere of path and pace of development. The states are not involved or even taken into confidence for entering into global agreements such as the World Trade Organisation (WTO) or linking petroleum prices with the global market that directly affects agricultural-dominant states.

However, the Centre wants state governments to share the negative fallout of their economic policies like cut in the petroleum subsidy. From where will revenue loss faced by the states be met? This only means that the states will depend more and more on private debt to meet its expenditure responsibilities. For instance, in Punjab, the share of market borrowing has gone up from 3% in 1990-91 to more than 90% in 2011-12. On the contrary, loans from the Centre as a source of financing fiscal deficit has declined from 85% of gross fiscal deficit in 1990-91 to 2% in 2012-13. This has multiplied the debt and debt servicing costs leading to diversion of funds from the social sector.


There is an inherent process of centralisation in place with increasing control of the Centre on allocation of resources. The problem is not resources, but devolution of autonomous resources. Resources under the rule-based devolution process of the Gadgil-Mukherjee formula have dwindled and have been overtaken by tied assistance.

The scope for discretion of the states to initiate state-specific development strategy is being minimised and the Union government is implicitly suggesting that it knows what is best for the states and that "one size fits all".

The Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) in the present form is an example, particularly in the context of labour deficit states like Punjab. Another example is the Union government's district-level agriculture productivity enhancement programme. For this, one has to have state-level policies. How can one formulate policies for restructuring macro infrastructure like irrigation network, electricity supply system at the district-level instead of the state-level?


The argument that Punjab should not be given financial package as it is in a fiscal mess is fallacious. For instance, the 13th Finance Commission observed that Punjab, West Bengal and Kerala need support to meet fiscal deficit that was an outcome of politics of populism and fiscal indiscipline. On the other hand, the 14th Finance Commission argued that Punjab was neither in economic distress nor fiscally undisciplined as of now. Hence, no need for financial package. The Union finance minister said that West Bengal would benefit from the recommendations of the 14th Finance Commission as it could manage to carry forward fiscal indiscipline and deficit tag. And, Union minister of state for finance Jayant Sinha further added that prosperous Punjab does not deserve a financial package.

What has happened in these five years? Has Punjab become prosperous? Or it has observed fiscal discipline? It will be an empiricist trap to argue from the parameters of the Finance Commission as these are statistical constructs. This must be placed in the larger context of India's federal structure.


Formulating policies by using fiscal deficit as the main guiding principle may distort the vision and lead to a drift from peoples' welfare needs. For instance, the share of social sector expenditure has gone up from 17.3% in 2004-05 to 32% in 2012-13. Interestingly, the social sector spending in 2004-05 was low. Pursuing the fetish of removing fiscal deficits, the government came out with a scheme to employ untrained teachers from the same village on contract for reducing the government expenditure on salaries. As a consequence, the quality of teaching deteriorated. While the system was required to impart quality education, the policy planners aimed only at fiscal fix. The imbalance in the long-term development expenditure that has been compromised in the state for meeting deficit targets must be corrected.

Subsidies are considered a negative performance indicator. For instance, agriculture dominant states provide power subsidy to farmers. This is considered negative. Agriculture sector needs support. In this context of subsidies, the Centre follows double standards. When it gave `70,000-crore debt waiver to farmers, it was termed good economics enacted with political finesse. But when the states give even genuine subsidies, these are branded as bad fiscal management. The need, therefore, is to apply filters so that subsidies are not distributed as doles but promote equity, productivity and competitiveness. Thus, it is more of a governance issue.


To hinge arguments for non-performance of the state in social development and social security around fiscal deficit would lead to distortions in governance. The need is to review development priorities and shift the same in favour of capital formation, social development and peoples' well-being and also to restore federal character for ensuring autonomy of the states to allow prioritisation of development initiatives in sync with people's needs.

To find the right solutions, right diagnosis has to be done. There is a need to restructure the policy of federal transfers based on single-minded obsession towards sustainability or efficiency of financial allocations. The increasing debt servicing costs for the states raises some fundamental question about why the cost of public expenditure is so high. Along with this, Punjab needs a governance fix rather than a fiscal fix.

(The writer is director, Institute for Development and Communication, Chandigarh)

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First Published: Jun 16, 2015 23:11 IST