6th Punjab finance panel for cut in debt-GSDP ratio
The commission headed by former chief secretary KR Lakhanpal, which charted out a fiscal consolidation path for the debt-laden state, suggested that the state government bring down the debt-GSDP ratio from 48.34% at the end of 2021-22 to 43.71 of GSDP by 2025-26.
The sixth Punjab Finance Commission (PFC) recommended a five percentage point reduction in the debt to gross state domestic product (debt-GSDP) ratio and yearly targets for zero revenue deficit by the financial year 2025-26 to ensure fiscal consolidation of the state.
The commission headed by former chief secretary KR Lakhanpal, which charted out a fiscal consolidation path for the debt-laden state, suggested that the state government bring down the debt-GSDP ratio from 48.34% at the end of 2021-22 to 43.71 of GSDP by 2025-26. It has also been advised to fix the yearly targets at its own level to achieve a revenue deficit over the next four years and derive its fiscal deficit from the borrowing limit set by the central government, said people familiar with the matter.
The panel, which looked at augmenting the consolidated fund of the state besides devolution of funds to local bodies and the imbalance that exists, had submitted its report to Punjab governor Banwarilal Purohit on March 29 this year after the Aam Aadmi Party (AAP) formed the government in the state. The commission’s report and suggestions, which have been kept under wraps so far, are important as the state has been in the throes of a severe financial crisis in the past few years with a mountain of debt.
A finance department official said the Punjab Finance Commission’s report is under consideration by the state government. The 15th Central Finance Commission had recommended to the state governments to process the reports of the State Finance Commissions (SFCs) expeditiously and present them to the state legislature with an action-taken report and accept the recommendations made with regard to devolution of funds.
Debt composition makes restructuring difficult
The outstanding debt stood at ₹2.84 lakh crore at the end of 2021-22 revised estimates which is estimated to rise to ₹3.05 lakh as per the budget estimates for the financial year 2022-23. The commission has pointed out that against an average annual growth of 13.66% in the state’s GSDP, its outstanding debt has reported an average annual of 21%. Another worry is the debt composition comprising commercial loans, provident funds, reserve funds and deposits which makes it difficult for the state to seek debt relief or debt restructuring.
The state government will have to bear a heavy burden of interest and repayment every year for the next 10 years up to 2029-30, sources said, quoting the commission’s report to the state government. The AAP government, in a white paper tabled in the Punjab assembly on June 25, had painted a grim picture of the state finances, which, it said, are in a “free fall”. As the new government has continued to borrow, the free power scheme and other announcements are bleeding the exchequer dry, and the government employees’ salaries were also delayed this month.
Utilise public assets to garner revenues
The commission has recommended the use of large public assets owned by the Punjab government and its entities for garnering revenues by enabling urban development authorities, municipalities and improvement trusts to capture the appreciation in land value by framing uniform policies for change of land use charges, development charges, increase in FAR and offering tradeable development rights. A separate department of investment and public assets management with the chief minister as the minister in-charge and the chief secretary as the administrative secretary has been suggested with the mandate to create an inventory of public assets and their disposal in an optimal manner and the proceeds can be used to retire expensive debt or for setting up productive public assets. ‘Value Capture Finance’ (VCF), deployed by some progressive states, has been suggested to unlock land values to finance urban infrastructure.
Questions over off-budget transactions
The Punjab government has been advised to plough all revenues into the Consolidated Fund of the State (CSF) for improving the quality of public finance. In recent years, revenues of the Public Infrastructure Development Board, Punjab Rural Development Board, Punjab Municipal Infrastructure Development Fund, Punbus, Punjab Pollution Control Board and Punjab State Transport Society among others have been kept out of the CFS. The panel questioned the off-budget transactions as against the fundamental principle of public finance, besides citing other reasons, including dilution of transparency and accountability, poor outcomes and skewed priorities, according to persons quoted above.
The commission, which went into the finances of the panchayati raj institutions, found their income and expenditure as inadequate to discharge their statutory functions as not only their revenues are negligible, but they also lack organisational capacity and technical expertise. An increase in property tax in rural areas, imposition of entertainment tax and mobile service tax and 20% share in total proceeds of the professional tax are some of the measures recommended to bolster their resources.