Guest Column| Fiscal management and the politics of debt
Public debt is rising because revenues are not increasing as much as they should, whereas expenditures remain uncontained. From 2006-07 to 2021-22, Punjab’s total revenue receipts have increased by 365%, whereas the revenue expenditure has increased by 409%. It has diminished the government’s capacity to meet its expenditures and service the debt, indicating financial mismanagement and lax tax administration
Sovereign debt has become a subject of politics in Punjab. It is posed as a sinister political design without any analysis and solution. However, it is rising by the year irrespective of the government. Public borrowings are an integral part of the state’s fiscal management.
Public debt comprises central and state government loans and the borrowings of the state public enterprises and local governments if guaranteed by the government. The liabilities on account of unfunded payments, social security funds, unforeseen contingencies, and failed public and private partnerships are also covered.
Simply speaking, public debt is rising because the revenues are not increasing as much as they should, whereas the expenditures remain uncontained. From 2006-07 to 2021-22, the state’s total revenue receipts have increased by 365%, whereas the revenue expenditure has increased by 409%. It has diminished the government’s capacity to meet its expenditures and service the debt, indicating financial mismanagement and lax tax administration.
Punjab is not under-taxed. The state’s tax-GDP ratio is comparable with other states, but tax compliance is poor. Staffing costs are high, food accounts are in chronic deficit, infrastructure costs are exorbitant, and maintenance costs are not sustainable. The monetisation of assets has made up for some of the revenue deficit instead of asset recreation and long-term financial de-stressing.
Debt to GDP ratio has worsened
Punjab’s economy has not expanded as much as it should have, though it had the advantage of earlier speedier growth. It remains agriculture-dependent, with almost stagnant soil and water productivity. With fixed land stocks, there have been no major gains in agriculture outputs for a long time. The industrial growth is slow, and the services sector is filling the gap to boost the state GDP, which otherwise reflects inflationary increase only.
The state’s debt to GDP ratio has worsened over the years. It was 33.06% in 2010-11 and rose 45.88% in 2021-22, clearly signalling the non-sustainability of the debt. Debt servicing is a drain on the state exchequer, and long-term public expenditure and capital investments have declined over the years. The compliance of the Fiscal Responsibility and Budget Management (FRBM) Act is deceptive with invisible machinations, which have proved elusive even to the comptroller and auditor general (CAG).
Public borrowings are a fact of life across all states and even countries. It is an essential budgetary tool to balance the state’s annual financial requirements. The borrowings should, however, be prudent and analysed carefully without making them a part of any political design. The state should resist unsustainable political policy ambitions that add to the avoidable financial burden.
Debt sustainability analysis
The debt sustainability analysis of Punjab should identify the historical shocks, the locational disadvantages of border, mand, and bet areas, and the idiosyncratic shocks suffered due to Naxalism and extremism. The export shocks have also been experienced with the increase in exports from China in sectors such as bicycles, hand tools, textiles and garments, and even sports goods should be examined. The contingent liability shocks such as the Covid-19 pandemic and the impact of unrealised climate change such as floods and drought merit attention. Agriculture production has declined in 2022 due to inexplicable weather shocks.
The shocks due to unstable politics, intransigent bureaucracy, weak policy, and institutional structures are too peculiar to the state. The mismanagement of food accounts, poor administration of the transport and mining sectors, high staff costs, sluggish growth of GST revenues, and non-transparent governance are clear pointers in this direction. The brain drain shock does long-term damage, reducing the quality of its human resource and the resultant decline in the future economic capital of the state.
Historical shock and locational disadvantages need the attention of the national government. Punjabis have worked hard not only to achieve a peaceful living for themselves but have also safeguarded international borders, ensuring the country’s territorial unity and integrity, and food security. The Government of India should provide special financial assistance for the development of borders and other difficult areas and costs of contingencies such as terrorism owing to geopolitical factors.
Develop industries, service sectors
The development of industries and service sectors to change the character of the economy, making it more broad-based and balanced, depends on the state policies. These policies should enable the advantage of market reforms and reduce dependence on agriculture by making other sectors more vibrant and remunerative. Public and private investments should increase in ventures, which are viable as per the state’s natural endowments and topography and create more jobs for the youth. Food processing, agribusinesses, pharmaceuticals, and retail trading are some of the critical areas that need attention. The state should neutralise the anticipated GST shock by toning up tax administration.
The agriculture sector has done well, not only for the state but also for national food security. It is now stagnating with almost stalled productivity of both soil and water. The soil quality is depleting, and water availability is declining due to excessively intensive agriculture operations, which are not sustainable. The national agriculture policies should induce reforms to raise farmers’ incomes without compromising on national food security. The policies should, however, be evolved with the active participation of farmers and mitigate rising farm household debt and the impact of climate change.
Brain drain to brain gain
For the long-term betterment of youth, public investment in education and health should increase to improve the quality of human capital and secure future economic capital. The state should target to reverse the brain drain into brain gain.
Democratically elected governments cannot ignore political commitments. These should, however, be fulfilled through sustainable policies, replacing the existing unsustainable policies and expenditures. The new social contracts should be designed for economic security and social safety of the poor and most vulnerable populations, leaving no scope for leakages or misuse of benefits.
Alongside special financing by the Government of India, the state government needs to ensure more financial and administrative discipline and transparency. It should restructure its debt by replacing high-cost loans with low-cost borrowings and fully comply with the FRBM provisions, Reserve Bank of India’s policies, and the economic reforms enunciated by the Centre. The fiscal management of the state should align with the national mainstream efforts with due care and caution for state-specific requirements without making it an issue of politics. sureshkumarnangia@gmail.com
The writer, a retired IAS officer, is a former chief principal secretary to the Punjab chief minister. Views expressed are personal
