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Punjab's fiscal policy needs revamp

Punjab economy was India's leading state economy during the pre-reforms era, especially after the Green Revolution. Thus, Punjab acquired the status of being the most vibrant and prosperous state. Over a long period, Punjab remained at the first position in terms of per-capita income. Kesar Singh Bhangoo writes

chandigarh Updated: Feb 26, 2013 09:56 IST

Punjab economy was India's leading state economy during the pre-reforms era, especially after the Green Revolution. Thus, Punjab acquired the status of being the most vibrant and prosperous state. Over a long period, Punjab remained at the first position in terms of per-capita income.

The state has lost its economic glory and slipped behind many states not only in terms of per-capita income but also in other economic indicators. Recently, a debate on the issue has been initiated in academia and policy-making circles to pinpoint the causes and factors responsible for the existing scenario of Punjab's economy.

This debate has been concentrating around two lines of thought: first, Punjab itself is responsible for the below-potential performance and the present economic crisis, as mentioned in a recent report, 'Economic Freedom of the States of India 2012'; second, policies of the state and central governments and some social, economic, geographical and federal factors led to the dismal performance of the state, as stated in a policy document, 'Rejuvenation of Punjab Economy: A Policy Document' of the Centre for Development Economics and Innovation Studies, Punjabi University, Patiala.

As far as the first line of thought is concerned, there is no denying that this was precisely because the policies of successive state governments during the neo-liberal regime remained ineffective.

Consequently, the fiscal policy of the state governments was in disarray, which led to the investment collapse. Due to some vested interests, the economic freedom report tries to brand the hard realities that Punjab faced and is facing as myths. At the same time, the report also disappoints the academicians who support the cause of Punjab. Further, the report also attempts to compare the incomparable and mislead people of the country. It is highly condemnable, unfortunate and seems that campaigners of the first line of thought attempt to weaken the pressure generated on the Centre by the believers of the second line of thought for granting an investment revival package to Punjab.

Regarding the second line of thought, the common policy issues emerged that if Punjab wants to regain and achieve its lost economic glory, then the state requires diversification and structural transformation of its economy. Punjab's economy has been facing a chronic shortage of investment in capital formation as the investment-state domestic product (SDP) ratio remained below 20%, which is 15 percentage points lower than the all-India ratio and lowest among the 14 major states of India.

Further, the investment in the agrarian economy of Punjab has continuously been declining as the investment-agriculture state domestic product ratio has reached an all-time low of 9%, according to latest available estimates. The state's fiscal policy urgently needs a revamp, so that the low tax-SDP ratio of 7% is raised to 12% and this is possible by increasing tax compliance, elimination of tax evasion and imposition of new taxes. Universal approach to subsidies should be eschewed with immediate effect and subsidies should be provided for building capabilities of deprived/sufferer sections of society for a limited time based on the principle of social justice.

The rejuvenation of the economic development process remains the fundamental responsibility of the state government, but major and dynamic policy instruments that affect the state's growth momentum are under the Centre's control.

The Centre's neo-liberal policies with regard to the external sector, decontrol of prices, tax restructuring, and many more, in fact, have played havoc with the economic growth momentum of the state. Therefore, it is suggested that the tendencies of the federal structure which are becoming more and more unitary need to be curbed as early as possible.

Since Punjab has been substantially contributing and will contribute to the food security of the nation and also its strategic location from the point of view of national security the revival of Punjab's economy is both in national as well as state's interests. Here, it is pertinent to point out that the constraints of economic development encountered by Punjab's economy are partly under the purview and control of the state government and partly under the Centre. Thus, it demands joint efforts of both governments for the removal of constraints for realising the potential of economic growth.

At this juncture, the Centre's initiatives will go a long way to set things right. To tide over the unprecedented crisis, Punjab's economy needs, deserves and demands from the Centre not only the long-pending debt relief package, but a capability-building investment revival package.

This package must at least cover the investment deficiency gap between Punjab and Indian economy based on the difference of investment-gross domestic product ratios. The proposed investment revival package worked out to the tune of Rs 11,000 crore per annum for five years will rejuvenate Punjab's economy. This will also lay down the road map for states' long-awaited structural transformation from agrarian to industrialised economy, along with ensuring food safety and security of the national economy.

The writer is a professor of economics at Punjabi University, Patiala. The views expressed are personal.