Inspired by the insights of economists like Böhm-Bawerk and von Mises on capital’s role at the intersection of economics and finance, a compelling framework for understanding fiscal challenges takes shape. This approach encourages synergies in economic decision-making and accounting practices, while also treating money as a social institution. When applied to Punjab’s fiscal crisis (a whopping Rs 3 lakh crore state debt), this understanding of public finance is timely and essential. The crisis is a largely undeclared emergency, signalling difficult times ahead for the state’s political and executive leaders as they struggle to devise effective solutions.
Much of this turmoil stems from a pattern of misjudged economic costs and a disregard for the opportunity cost theorem. Over time, state agencies have missed opportunities to maximise economic returns and have failed to justify their subjective estimates and idiosyncratic evaluations. This trend has gradually sidelined the crucial role of capital valuation in principal-agent relationships, which remains overlooked in decision-making processes.
The Government of Punjab must recognize that, within its constitutional mandate, it holds the authority to shape and enforce the economic framework within its borders. This role requires more than superficial engagement with the risks it faces, especially when opting for pareto-efficient outcomes—those where no one can be made better off without making someone else worse off. Such precision is especially crucial in areas of social welfare, where success is judged by improvements in welfare after interventions. In terms of capital investments, which disrupt the economy’s natural trajectory had they not occurred, a distinct approach is needed. Here, Punjab should pay closer attention to the social rate of time discount alongside cost-benefit analysis, ensuring that total impacts are closely connected to their immediate effects. Moreover, the public must realise that inefficiency in public finance often points to underinvestment in systems that enhance and monitor the quality of government spending. Without quality-driven expenditure, less value is achieved per rupee spent, ultimately diminishing the well-being of citizens.
Turning to data from 2018 to 2024 reveals persistent revenue-expenditure imbalances and a reliance on borrowing. The revenue deficit, which peaked at 3.66% of GSDP in 2021, has dropped to 2.77% in 2024. Revenue receipts grew 5.94% in 2024, while revenue expenditure rose by 3.10%, narrowing the gap yet keeping the reliance on borrowings high. Committed expenditures—76% of revenue receipts—continue to dominate limiting development spending flexibility. The 33% decrease in central grants for 2024-25, paired with the end of GST compensation, further restricts fiscal manoeuvrability, despite a 15% increase in own tax revenue.
The fiscal deficit remains a key concern: although it is set to decrease from 4.10% of GSDP in 2023 to 3.79% in 2024, past peaks (5.65% in 2021) indicate structural issues. Capital outlay has been erratic, with a 38% shortfall against the 2023-24 budget, reflecting underinvestment in infrastructure despite a planned 16% increase for 2024-25. With Rs 20,200 crore allocated to the power subsidy—19% of revenue receipts—significant fiscal space is consumed with limited infrastructure returns.
Adding to these concerns, the CAG’s 2024 report unveils even deeper financial issues. For example, off-budget borrowing of Rs 3,243 Cr through parastatals and public sector enterprises bypassed the Consolidated Fund of the State. When included in debt calculations, which already grew at an average of 9.25% annually from 2018-19 to 2022-23, these liabilities now reach 44.12% of GSDP, making debt stabilisation seem distant. The situation worsened in October this year, with Punjab borrowing another Rs 2,300 Cr from the market, with repayments due between 2044-49. This must be considered alongside the Rs 19,000 Cr in State Development Loans (SDL) in the secondary market, underlining that Punjab can no longer rely on growth alone to meet its debt obligations. The report also brings attention to broader issues in public finance management, including non-compliance with Indian government accounting standards, underutilised funds within the Single Nodal Agency System (where 51% of funds went unspent in FY 2022-23), and an unaccounted Rs 736 Cr collected through various cess/levies. Furthermore, Rs 60.73 Cr was tied up in 16 inactive State Public Sector Enterprises, alongside the notorious DISCOM debt, raising questions about accountability and efficient resource utilisation.
One is compelled to wonder: What lies ahead for Punjab? The state is caught in a “Democracy before Development” paradox, where successive governments continue to attribute financial woes to the asymmetric decentralisation within India’s federal structure. Whether this structure is the root cause or not, the people of Punjab ultimately bear the burden through higher taxes on petrol, diesel, motor vehicles, and loans, as well as increased service charges at Suvidha Kendras, rising bus fares, elevated collector rates and finally revocation of power subsidies.
Punjab’s government must adopt a decisive, strategic approach to public finance management. The focus must shift to effective budgeting and implementation, particularly as numerous sectors have seen utilisation fall short by over 50% over the years. One effective strategy would be categorising budget expenditures according to key objectives (Subhash Garg, 2022): the provision of public goods and services, redistribution, growth stimulation, and maintenance. Additionally, the government should establish indicators across departments to ensure a higher quality of expenditure. Punjab governments Building Fiscal and Institutional Resilience for Growth (BFAIR Project) is a good step in this direction. Any reform must consider the interplay between reforms and their preconditions. By identifying complementarities, Punjab can avoid the risk of partial reforms in one period foreclosing beneficial options in the future.
References
- Pandey, Radhika, Madhur Mehta, Bency Ramakrishnan, Utsav Saksena, Nipuna Varman, and Kriti Wattal. Understanding States’ Debt and Bond Markets. NIPFP Working Paper Series No. 410, June 12, 2024.
- Horwitz, Steven, and Louis Rouanet, eds. A Research Agenda for Austrian Economics. Elgar Research Agendas. Cheltenham, UK: Edward Elgar Publishing, 2023.
- Garg, Subhash Chandra. The $Ten Trillion Dream: The State of the Indian Economy and the Policy Reforms Agenda. India Portfolio, 2022.
- Successive State Budget Documents.
- Reserve Bank of India (RBI) Database.
- Comptroller and Auditor General (CAG). State Finance Audit Report 2024, Part II.
Anmol Rattan Singh is Co-Founder, PANJ Foundation.