Punjab should opt for crowdfunding to get out of debt trap: Economists

“We suggest to the government that among the several available options, one is to set up a debt relief fund and issue an appeal to all the concerned citizens to deposit the money in it voluntarily. This fund will only be utilised to reduce Punjab’s debt burden while making a tax exemption provision as in other similar cases. Punjabis all around the globe are by nature helpful and well-known in philanthropy. This cultural trait of Punjabis will go a long way to deal with the debt,” the economists stated.

They have pegged the accumulated debt to exceed Rs 3.80 lakh crore by March end. “Compared with other states of India, Punjab has the highest debt-GSDP ratio and is ranked number one. This has been mainly due to each government borrowing beyond the means and adding to the accumulation of debt,” they said.

“The debt accumulation started at an alarming rate of 22.85 per cent and 40.80 per cent in 2015-16 and 2016-17, respectively. Subsequently, it continuously rises at an average rate of more than 9 per cent per annum. The current government is also borrowing along the lines of the previous governments and will add more debt when it demits office.”

They also said that with the current liabilities, the promised employment generation in the government sector and promised transfer payments and subsidies, the government will increase expenditure without raising the desired level of revenue.

They also suggested that the government should set up a commission to find viable options to reduce the debt burden by half in the short term and to suggest measures to rescue the state from the debt burden in the medium to the long run.

“Punjab can raise its revenue and make the required investment to revive the economic growth momentum of the economy, but the accumulated debt will continue to remain a big constraint. Then the question arises of what novel ways will be available to the Punjab government to reduce the debt burden. Given the government’s current approach to cater for the debt, either from the increased revenue (that has not been realised) or more borrowing for servicing the debt, it will be a sure way for Punjab to remain in a debt trap,” the economists said.

The trio said the government could float bonds to provide immediate relief from the mounting debt burden. “The Punjab government should take into confidence the well-known intellectuals of Punjab and the leadership of other political parties to develop a consensus and take up this matter with the Union government for a debt relief package.”

The trio had earlier written to the Centre that there should be a moratorium of seven years on the debt. In Sunday’s letter, they again opined that the government could seek a moratorium on debt which will not only stop the debt payment but also halt interest payments charged on the accumulated debt. It is our opinion that the multiple options suggested above must be worked out meticulously in fine detail and placed before the public to build a favourable opinion for converting it into policy actions.

“The people of Punjab had given a decisive mandate and elected a government with the expectation that it would revive the state’s lost glory. Therefore, it is high time that the government should swiftly act while gathering all the courage and will to revive institutional arrangements of policy making and big bang actions to break both the traps (debt and slow growth) for sustainable development of Punjab economy,” they stated.

The economists blamed low gross fixed capital formation (capacity to produce output) due to a lack of capital investment. They said that the state government’s fiscal policy turned dysfunctional, needed more resources to make a new capital investment, and failed to revive the development process.

“The story of non-functional fiscal policy is visible when we look at the accumulated debt of Punjab state. According to Reserve Bank of India (RBI) statistics, the Punjab government has borrowed from various sources more than three lakh crore rupees up to March 2022, which amounts to 53.3 per cent of the Gross State Domestic Product (GSDP). If we include the pending liabilities, non-guarantee loans, and expected borrowings of the current fiscal year (2022-23) by the Punjab government, the total accumulated debt by March 2023 will exceed Rs 3.80 lakh crore.”

“The origin of the accumulation of debt of the Punjab government goes back to the mid-eighties (1984-85) when revenue deficit emerged in the government revenue accounts for the first time. But the revenue deficit has turned chronic since 1987-88. This was a time of turmoil in Punjab when all the institutions turned dysfunctional, including the revenue collection. They said that the institutions’ functioning had not been restored due to vested interests.

“When the present government, in its initial days, attempted to transition the state from a security orientation to a developmental one, the vested interest swiftly acted and even used the judiciary to relapse the state of Punjab again to a security concerned one. The Punjab government instead announced recruiting more police personnel every year to strengthen the security system of Punjab. Despite all claims to fill the government’s coffers, the present government incurred a revenue deficit of the order Rs 15,348.55 crore in the first nine months after assuming the reins of power against its revenue deficit target of Rs 12,553.80 crore for the year 2022-23.

“Based on the latest three-year average, Punjab has borrowed Rs 35,201.87 crore annually. But to service accumulated debt, it pays (interest payments Rs 18,209.8 crore + repayment of principal Rs 14,257.98 crore) Rs 32,467.78 crores. The net availability of the borrowed funds turned out to be Rs 2,734.09 crore, which is just 7.8 per cent of the total borrowings. This clearly shows that 92.2 per cent of the borrowed funds was used to service the debt,” they added.

“When we investigate the revenue-raising capacity of the state government, the empirical evidence shows that the Punjab government is consistently incurring a revenue deficit of the order of more than two per cent of the GSDP. The revenue deficit-GSDP ratio was 2.56 per cent in 2018-19 and increased to 3.23 per cent in 2020-21. In the ongoing year (2022-23), the revenue realisation so far is 63 per cent of the target,” said the experts.

“This evidence clearly shows that Punjab state is expected to increase the revenue deficit to GSDP and add further to the debt accumulation. It is contrary to the claims of the present government when it came to power. Suppose we include the accumulated liabilities, the promised employment generation in the government sector and promised transfer payments and subsidies. In that case, the government will increase expenditure without raising the desired level of revenue. Despite a pessimistic situation in which Punjab has been trapped, there is a ray of hope if the government takes concerted steps to come out of the double trap-slow growth and debt trap,” they added.