Guest column | Punjab budget must strive for growth, efficiency and equity

The FM needs to adopt innovative strategies to mobilise additional resources. Introducing fresh but progressive taxes, revising rates of existing taxes and user charges, improving tax compliance and digital technology driven tax reforms can help raise additional resources, particularly from state excise

Punjab’s budget will be presented on June 27. Empirical evidence suggests that the fiscal health of the state is in a precarious condition. For improving the health, the finance minister (FM) should steer the budget to promote growth, efficiency and equity. These pillars assume added significance in the light of inputs received by the FM from stakeholders through consultative meetings and the Janta Portal. In addition, fiscal parameters of serious concern also deserve immediate policy response.

Fiscal well-being of an economy depends upon the rate of growth, which in turn depends upon economic stimuli provided in the budget. (Representative Image/HT File)

Growth

Fiscal well-being of an economy depends upon the rate of growth, which in turn depends upon economic stimuli provided in the budget. Thus, identifying the drivers of growth and designing suitable fiscal stimuli for their promotion should be accorded priority in the budget. The probable drivers of growth are smart technology and knowledge-driven industries and services; start-ups; special economic zones; rural industrialisation; infrastructure; and renewable energy. Most of these drivers depend on quality of human capital and hence social sectors such as education and health deserve liberal funds. Punjab allocated 11.6% of funds to education in 2021-22 budget against 16% by all states. In view of the strategic importance of education and election promises by the government, at least 20% of the funds should be earmarked for education. In case of health, Punjab allocated only 4% against 6% by all states. Health being a priority area of the government, needs 10% funding.

Efficiency

In the budget, funds are allocated but for their efficient utilisation quantifiable techniques are hardly employed. The FM has policy option like outcome budgeting for getting value for money. The thrust of this budgeting system is to make allocations output and outcome-centric and hence promote efficiency. The Centre and 11 states, including Haryana and Delhi, have adopted outcome budget. Punjab may adopt this innovative practice in the budget on pilot basis in select programmes by mentioning expected results of the allocations. Elimination of wasteful expenditure also promotes efficiency. Normally, an incremental approach (say 10% increase) is adopted for allocating funds without examining their economic rationality. Zero-based budgeting (ZBB) is a policy instrument for weeding out expenditure on obsolete programmes. Under ZBB each programme starts from a scratch and is included in the budget if its outcome is productive. This tool can be adopted again in the budget on pilot basis for eliminating wasteful expenditure.

Equity

The budget is an effective fiscal tool to promote equity by taxing the rich and spending the collected revenue on the economic well-being of the poor. The promotion of equity becomes important in the light of election promises of the government. Though Punjab has a low number of poor, it has a fairly high degree of economic and social inequalities. For moderating inequalities new programmes targeting the lower strata may be introduced. These may include guaranteed universal basic income; employment scheme for urban poor; free education and cashless medical treatment for the socially and economically disadvantaged.

Fiscal parameters of concern

Five parameters of fiscal health of the state are critical and deserve the FM’s attention.

(1) High fiscal deficit: Fiscal deficit shows excess of expenditure over receipts. It was 5.26% of state income in 2020-21 (revised estimates). The FM should consider the recommendations of the 15th Finance Commission to reduce the fiscal deficit to 3.5% in 2022-23 and further to 3% during 2023-26.

(2) Mounting public debt: For meeting the difference between expenditure and receipts, government resorts to borrowing. This has gone out of proportion in Punjab. The outstanding debt was ₹2,73,703 crore (2020-21 revised estimates) and constituted 48.2 % of the state income, which is the highest among states. The 15th Finance Commission has recommended a limit of 32.5% for all states in aggregate by 2025-26. The upcoming budget shall consider presenting a roadmap for five years for bringing the ratio to 32.5%.

(3) Low capital outlay: Capital outlay is allocated for assets creation. It was ₹6,822 crore (2020-21 revised estimates), constituting only 5% of the total expenditure. Low allocation is mainly due to high committed expenditure (80% of the revenue receipts) on payment of salaries, pensions, interest and subsidies. For promoting growth, enhanced budgetary allocation to capital outlay should be considered on priority.

(4) GST compensation: According to the GST (Compensation to States) Act, 2017, the Centre was required to compensate for five years the revenue loss to states due to GST implementation. Punjab was likely to get ₹16,871 crore as compensation for 2021-22. The GST compensation, however, is ending on June30, 2022. In the budget, the FM, thus, needs to find revenue to meet this loss. The assembly may pass a resolution for the consideration of the Centre to extend the compensation provision for the next five years.

(5) Stagnation in revenue generation: Punjab is experiencing stagnation in revenue generation. The state collected ₹29,995 crore as tax revenue in 2019-20 which works out to be marginally higher ( ₹30,409 crore) in 2020-21 (revised estimates). The actual amount is likely to fall short of this. The state’s own non-tax revenue was ₹6,654 crore in 2019-20 and it was ₹4,633 crore (revised estimates) for 2020-21. The non-debt capital receipts were ₹45.4 crore as per the 2020-21 budget that declined to ₹10 crore in revised estimates. The most disturbing fiscal parameter is lack of policy decision to mobilise additional resources from 2019 to 2022. The FM needs to adopt innovative strategies to mobilise additional resources. Introducing fresh but progressive taxes, revising rates of the existing taxes and user charges, improving tax compliance and digital technology driven tax reforms can help the FM raise additional resources, particularly from state excise; sales tax/VAT; taxes and additional duties on electricity; stamp duty and registration fee; taxes on vehicles; and user charges.

ghumanbs54@gmail.com

The writer is a former vice-chancellor, Punjabi University, Patiala. Views expressed are personal