Is Punjab economy inching towards debt trap? Is there really a cause to worry? These are natural questions that should arise inquisitively while having a cursory look at the ever soaring debt burden on the Punjab.
Typically, debt trap is a situation when debt-to-GDP ratio is persistently rising over time to the government’s ability to refinance becomes a cause of worry. In other words, the repayment of debt is compulsively resorted by ways of raising more debt leading to a vicious circle of spiraling debt.
But, simply looking at the mounting debt burden may be misleading unless the quality and efficiency of expenditure done by the state is also taken into account and scanned thoroughly in reasonable detail. Because, if quality and efficiency of expenditure done is high, it will help mobilize revenue in the form of increased tax collection and crowding in private investment which will strengthen the fundamentals of economy and put it on higher growth trajectory which in turn would help easing out the debt burden in the long run.
If debt burden of Punjab is not alarming it is certainly a point to worry about with adequate solemnity. In 2018-19, total outstanding debt of the state was Rs 211,917 crore, which within three years escalated to Rs 273,703 crore in 2021-22 and is further estimated to shoot-up to Rs 315,748 crore in 2023-24. In 2019-20, 82 per cent of state’s own tax and non-tax revenue, put together, accounted for debt servicing only, and the ‘interest payment’ on the outstanding debt amounted to 48 per cent of the state’s own tax and non- tax revenue. Today, annual ‘interest payment’ liability only is about Rs 18,000 crore and annual outgo on total debt servicing liability is about Rs 36,000 crore.
To understand the more nuanced position of debt burden one needs to look into the details of total expenditure and total revenue receipts
plus non-debt revenue. In 2019-20, total expenditure, including total revenue expenditure, capital expenditure and repayment of ways & means advances, was Rs 134,045.15 crore compared against the total revenue receipts plus non-debt receipts of Rs 77,645.49 crore. That means there was a shortfall to the tune of Rs 56,399.66 crore. This shortfall is usually filled through borrowings from the market, which is accumulating in the form of outstanding debt. Worrying factor is that this shortfall is rising with time.
This accumulation of debt is reflected in persistent rise in debt-to-GDP ratio which is posing a serious challenge to the economy of Punjab. Economic prudence demands to handle this situation sooner than later.
Now, question is why debt is accumulating faster than ever before. The idea here is not to give exhaustive list of reasons but the key reasons of spiraling debt. One, the committed expenditure of the state, which includes salaries & wages, pensions, interest payment and subsidies, is very high. Total committed expenditure forms about 81 per cent of the revenue expenditure and 97 per cent of revenue receipts. In this, major worrying factor is that both interest payment and subsidies components have been consistently increasing. As and when more and more freebees and populist promises are made, or will be made, there will be direct and proportionate increase in the debt and interest payment given the fact that tax buoyancy and revenue buoyancy is lower in Punjab especially due to weaker growth of industrial sector.
Two, state’s own tax buoyancy with respect to the GSDP has come down from 0.90 in 2014-15 to 0.42 in 2019-20, which means that growth rate of own tax revenue has been lower than the growth rate of GSDP. This is not a healthy sign for the economy and alludes to the fact that quality and efficiency of the government expenditure needs drastic improvement.
Quality and efficiency of expenditure may be measured from the ratio of capital expenditure to total expenditure and proportion of revenue expenditure spent in operation and maintenance of the existing social and economic services. Capital expenditure in Punjab forms only 3 per cent to 7 per cent of total expenditure. No one can deny the essentiality of capital expenditure which facilitates asset creation and generates opportunities for higher growth which further leads to higher resource mobilization through increased tax revenue depending upon the tax-revenue buoyancy.
It should, therefore, be a cause of concern for the Punjab that the ratio of capital expenditure to aggregate expenditure has been far below the General Category States (GCS) average during the period 2014-15 and 2018-19. The GCS average of capital expenditure to aggregate expenditure increased from 14.02 per cent in 2014-15 to 14.28 per cent in 2018-19. However, this ratio declined in Punjab from the already low level of 6.24 per cent in 2014-15 to 3.05 per cent in 2018-19.
Three, industrial sector in Punjab has been one of the most neglected which is clear from the figures that in 2019-20 only 5.4 per cent (Rs 1,850.37 mineralore) of total development expenditure (Rs 34,034.97) was spent in industry and sector, and in village and small industries only 0.27 per cent (Rs 92.88 crore) of total development expenditure. Between 2016-17 to 2018-19, expenditure in industry and mineral sector has been abysmally low between 0.24 per cent to 1.92 per cent.
Given the multiple challenges faced by the economy, as analyzed above, it is strongly desirable that ever mounting outstanding debt and debt servicing burden be controlled at this stage only before it is too late to mend. First step in this direction can be paying due attention towards the industry sector, especially micro, small and medium enterprises (MSME), which has great potential to generate much needed employment. Second step can be to control the non-development expenditure and increase the development capital expenditure.
Punjab Budget 2021-22 data shows that in 2019-20 about 76 per cent (Rs 5,848.05 crore) of total administrative services expenditure was consumed by police only and remaining 24 per cent (Rs 1845.16 crore) was consumed by Secretariat General Services, District
Administration, Treasury & Accounts, Public Works and other. There seems to be a case of rationalizing this side of expenditure. Thirdly, food-processing industries have reasonably good potential in the state. Ease of business is the key to accelerate and attract more investment. Presently, Punjab is ranked at 19th spot in the country at ease of business index, which is an indication that a lot needs to be done.
The author is an Indian Economic Service officer and works as Economic Adviser in the Ministry of Petroleum & Natural Gas