Guest Column| Challenges before Punjab and 16th finance commission
The cost as a border state; damage to environmental resources; mounting debt; deteriorating agricultural marketing infrastructure; and decelerating economy are challenges. The state should estimate losses due to these factors for the consideration of the commission to recommend a substantial share of central resources.
The President of India, under Article 280 of the Constitution, formed the 16th finance commission on December 31, 2023, for recommending the transfer of resources from the Centre to the states for five years beginning April 1, 2026. The finance commission is visiting Punjab on July 22 and 23. Punjab is facing daunting challenges, including huge cost as a border state; damage to environmental resources; mounting public debt; deteriorating agricultural marketing infrastructure; and the decelerating economy. The state should estimate losses due to these challenges for the consideration of the commission to recommend a substantial share of the central resources.
As a border state, Punjab suffers in terms of investment, industrial development and international trade. The sensitive border with Pakistan deters domestic and foreign investment. Punjab’s investment-state income ratio was 17.59% in 2021-22, almost half that of the Indian economy (33.4%). The share of FDI was only 0.49% from October 2019 to March 2024. Industrial development is also a casualty being a border state. The share of industrial sector in the state income is stagnating around 14%. Punjab has been suffering owing to curbs on trade to Pakistan since August 2019.
Punjab School of Economics, Guru Nanak Dev University, professor Ranjit Singh Ghuman’s study found that people and institutions involved in Indo-Pak trade incurred losses of ₹2,104 crore during the first 18 months of trade embargo and 12,000 workers lost jobs. It must estimate losses on all accounts being a border state for making the case for a special grant.
Toll on environment
Punjab is the food bowl of the country. The contribution of wheat and rice to the central pool is the lifeline of the public distribution system (PDS). Punjab, however, is paying a huge cost in the form of the toll on environmental resources. The state’s air, water and soil are sick, leading to increased health risks, including rising incidences of cancer. The state is on the verge of disaster on account of depletion of groundwater.
Punjab is extracting groundwater at an alarming rate. According to the Central Ground Water Board (CGWB) Report-2023, of the 153 blocks, 117 (76%) are in the over-exploited category. Three blocks are in critical stage and 13 in semi-critical stage. Only 20 blocks (a mere 13%) are in safe category.
Adversities originating from climate change would further aggravate the situation and national food security may be jeopardised. For conserving environmental resources, particularly water, the government should prepare estimates for crop diversification, modernising the canal system and adopting efficient modes of irrigation, such as underground pipelines, drip and sprinkler system. Most of the estimates are available. The government should update the estimates for the consideration of the finance commission for recommending environmental sustainability grant from the national food security perspective.
Mounting public debt
Punjab is reeling under mounting public debt of ₹3,43,626 crore, constituting 49% of the state’s income in 2023-24. The state missed the bus during the 14th finance commission, but it can’t afford to miss the opportunity now due to its precarious financial health. The 16th finance commission’s terms of reference though do not cover debt directly. It, however, should consider the debt of Punjab under Article 280 (d) making a reference to ‘interest of sound finance’ and also as per Articles 292 and 293 concerning Union and state borrowings. The commission while making recommendations about grants to states can deal with debt because debt servicing is a major component of expenditure. The Punjab government should articulate its case for debt relief before the finance commission by providing data about deteriorating fiscal health starting from the militancy period and further aggravated during the post new economic policy (NEP) era.
Agri marketing infrastructure
Agricultural marketing infrastructure is playing a pivotal role in procuring and transporting foodgrains for the central pool. The rural marketing infrastructure, including link roads is deteriorating due to withholding of the rural development fund (RDF) and market development fee (MDF) by the Centre. About ₹6,767 crore funds are pending with the central government and the case is in the Supreme Court.
In Punjab, 8,105 link roads having a length of 17,406km are in need of repair. The Punjab Mandi Board has approached NABARD for borrowing ₹1,800 crore for repairing link and other roads. Repairing marketing infrastructure cannot wait as it has direct impact on the PDS. Punjab should prepare estimates for the maintenance and upgrade of agricultural marketing infrastructure for the consideration of the 16th finance commission for recommending funds in view of India’s food security.
Punjab’s economy got a growth momentum after the NEP. The economy grew at 5.03% only between 2011-12 and 2021-22 and occupied 20th position among states. With a per capita state income of ₹1,18,381 in 2021-22, the state was at the 14th position. The slowdown has affected revenue buoyancy. The state should calculate revenue losses due to deceleration for consideration of the 16th finance commission for recommending grant to revitalise the economy.
Devolution and grants
Each finance commission adopts criteria for recommending devolution of central taxes to states. Punjab should request the commission to adopt a devolution criteria by assigning 50% weightage to income distance (the difference between the state’s per capita income and income of the state with the highest income), 12.5 % to area, 10 % to population, 15 % to demographic performance, 10% to forest and ecology and 2.5% to tax efforts.
After receiving the share of taxes, certain states still face financial distress. The finance commission makes corrections for cost disabilities confronted by those states by recommending grants. The 15th finance commission, for example, along with the revenue-deficit grant (grant to meet the gap in revenue account of states after devolution of central taxes) recommended sector-specific and state specific grants and also grants to local bodies. By following the approach of its predecessors, this finance commission should consider the case of Punjab to overcome cost disabilities from the challenges under grants-in-aid. ghumanbs54@gmail.com
The writer is a former vice-chancellor of Punjabi University, Patiala. Views expressed are personal.