“The existing freebies and newly committed “guarantees”, including Rs 1,000 per month to every adult woman, by the Aam Aadmi Party (AAP) in Punjab will eat up Rs 28,962 crore in 2022-23. It is over and above the facility of free bus travel to all women given by the outgoing Congress government. The debt service will consume another Rs 36,009 crore, while Rs 46,317 crore will go to salaries, pensions and retirement benefits. The total comes out to be Rs 1,11,288 crore (116.68 per cent of the total budgeted revenue of Rs 95,378 crore), resulting into revenue deficit to the tune of Rs 16,000 crore. It necessitates efficient and full mobilization of latent financial resources and rationalization of freebies. But that would require strong and unequivocal political will and rational decisions.”

Illogical freebies would neither be good economics nor good politics in the long term as they are bound to have an adverse impact on economic growth. Instead of spending the scarce and additionally mobilized financial resources on irrational freebies, the government must spend on education, skills, health and employment generation so that people get quality education and health services at an affordable cost.

Given the acute financial crisis, debt trap, decelerating growth and huge unemployment in Punjab, freebies should be given only to the really deserving sections of the people. Illogical and untargeted freebies would neither be good economics nor good politics in the long term as they are bound to have an adverse impact on the economic growth, employment and development. However, investment in education, skill development and health is sine qua non for development of human capital and overall socio-economic development. Thus, instead of spending the scarce and additionally mobilized financial resources on irrational and indiscriminate freebies, the government must spend on education, skills, health and employment generation so that the people get quality education and health services at an affordable cost.

The advocates of freebies, however, argue that if the government can write off outstanding debt of Rs 9.91 lakh crore of 10,306 willful defaulters during 2017-18 and 2021-22 (and Rs 1.84 lakh crore in 2019-20 and 2020-21 because of lowering the tax rate) in the corporate sector then what is wrong in giving freebies to other sections of the population. Critics of freebies, however, argue that there are huge (long-term) hidden costs of irrational freebies in terms of foregone opportunities. Experts, however, are broadly of the view that taking care of poor and marginalized sections of the population is the duty of the welfare state, yet, while giving freebies, fiscal capability of the government is a key factor. Not going into the rationality and irrationality of freebies, the subject needs an informed public discourse as it is turning into relentless competitive political populism with every succeeding election. Under such a scenario, people often are not in a position to take informed decisions about their interests. The White Paper issued by the Punjab Government in June 2022 admits that Punjab is passing through a serious financial crisis being reflected in ever-increasing debt, high revenue and fiscal deficit and increasing debt servicing. According to the RBI, the debt-Gross State Domestic Product (GSDP) ratio and revenue deficit in Punjab are the highest, while the fiscal deficit is the second highest among the 17 general category states. The outstanding debt of the government increased from Rs 83,099 crore (31.17 per cent of the GSDP) in 2011-12 to Rs 2.58 lakh crore (42.54 per cent of the GSDP; highest among all states, according to the RBI) in 2020-21 and to around Rs 2.82 lakh crore in 2021-22. This, along with the off-budget debt burden on public sector undertakings, adds up to 53 per cent of the state’s GSDP.

It is approximately 4.4 times of the current account revenue of the Punjab Government in 2021-21. The per capita debt in Punjab is the highest among all 17 general category states of India. The budgetary provision of Rs 35,000 crore loans in financial year 2022-23 will further increase the debt burden. The amount of debt-servicing increased from Rs 8,955 crore in 2011-12 to Rs 32,080 crore in 2020-21. Debt-servicing consumed Rs 32,080 crore of the gross borrowing of Rs 32,258 crore in 2020-21; in 2021-22 it was Rs 36,512 crore.

Clearly, the Punjab Government is in debt trap as the debt is being serviced by taking additional loans. The grossly under-mobilization of latent financial resources, coupled with irrational competitive political populism aimed at capturing votes, inter alia, have been mainly responsible for such a scenario. The stopping of GST compensation from July 1, 2022, will require an additional resource mobilization to the tune of Rs 12,000 to Rs 15,000 crore or will necessitate additional loans in 2022-23.

The decelerating growth rate for the past 30 years is also a cause for worry. In terms of the GSDP growth rate, Punjab ranked between 13th and 17th during 1992- 2012 among the 17 general category states and between 18th and 24th among all 28 states during 2013-14 and 2017-18. In terms of the net per capita income, Punjab started lagging behind Maharashtra in 1995-96 and during 2011-12 and 2018-2019, Punjab oscillated between 11th and 12th position and slipped down to 19th rank in 2019-20.

In terms of capital expenditure and per-capita capital outlay, Punjab ranks 11th and 17th, among the 17 general category states, respectively. During 2011-12 and 2020-21, capital expenditure remained only around 0.7 per cent of Punjab’s GSDP. Compared to the all-India average, Punjab’s investment-GSDP ratio (pre-requisite for economic growth) has been much below the national average since 1996-97. All this led to deceleration in the growth rate and increase in unemployment.

The existing freebies and newly committed “guarantees”, including Rs 1,000 per month to every adult woman, by the Aam Aadmi Party (AAP) in Punjab will eat up Rs 28,962 crore in 2022-23. It is over and above the facility of free bus travel to all women given by the outgoing Congress government. The debt service will consume another Rs 36,009 crore, while Rs 46,317 crore will go to salaries, pensions and retirement benefits. The total comes out to be Rs 1,11,288 crore (116.68 per cent of the total budgeted revenue of Rs 95,378 crore), resulting into revenue deficit to the tune of Rs 16,000 crore. It necessitates efficient and full mobilization of latent financial resources and rationalization of freebies. But that would require strong and unequivocal political will and rational decisions.

Punjab’s rank in terms of per capita own tax revenue is eighth among the 17 general category states. The share of non-tax revenue in the state’s total revenue declined from 28 per cent in 2008-09 to 9 to 12 per cent in 2020-21. Punjab’s own tax-GSDP ratio declined from 7.49 per cent in 2012-13 to 4.95 per cent (a decline of 2.54 percentage points) in 2020-21. This alone has led to an under-mobilization of latent financial resources to the tune of Rs 16,012 crore in 2020-21. My own estimates (now included in the sixth Punjab Finance Commission’s final report submitted to the government in March 2022) show that there is a scope for mobilizing additional financial resources to the tune of Rs 28,500 crore annually without imposing any additional tax. The break-up is as follows: Rs 5,000-crore excise duty, Rs 9,000-crore GST, Rs 2,000-crore stamp and registration, Rs 3,000-crore mining, Rs 3,000-crore property tax, Rs 1,500-crore professional tax, Rs 1,500-crore power theft, Rs 2,500-crore transport and cable and Rs 1,000-crore pilferage in social welfare schemes. Another Rs 10,000 crore can be added to it by moderately rationalizing the tax regime, freebies/subsidies and discretionary spending. The government and the people of Punjab have no option but to mobilize additional finances, use them judiciously and rationalize the freebies.

(The author is Professor of Eminence, Punjab School of Economics, Guru Nanak Dev University)