Punjab's fiscal woes

The Amarinder Singh government releases a White Paper outlining the fiscal crisis it has inherited from its Shiromani Akali Dal-BJP predecessor.

IN Punjab, government spending on salaries, pensions, and interest exceeded revenue receipts by over Rs.2,300 crores in 2000-2001. In order to meet even this committed expenditure, the State government has had to borrow. The State's public debt almost quadrupled from Rs.7,904 crores in 1991-1992 to Rs.27,830 crores in 2000-2001. A sum of Rs.2,400 crores loaned to the State by the Reserve Bank of India for foodgrain procurement has been diverted to meet committed expenditure.

During 1998-1999, there were just 10 days in the year when the State had a positive cash balance. Even this was achieved by withholding funds granted by the Union government and other agencies for specific projects. Despite this crisis, the Shiromani Akali Dal-Bharatiya Janata Party government, which lost power in the February Assembly elections, had granted annual sales tax concessions of Rs.900 crores a year.

Punjab's new Council of Ministers sat in stunned silence through a briefing on the State's finances, the sole issue on the agenda of its first meeting on March 6. Most of the Ministers knew that they would be inheriting a near-bankrupt exchequer, but few knew just how bad the situation was. At the end of the meeting, the government took an extraordinary decision: to make public the full scale of its problems. Within weeks, Chief Minister Amarinder Singh released an official document outlining the fiscal crisis confronting the State. No one in government, however, seems to have a clear agenda to address the issues that the White Paper on the State's finances has raised.

As the White Paper points out, Punjab's problems are not new. Fiscal stress became evident at the start of the State's decade of violence, when in 1984-1985 it first ceased to be revenue surplus. By 1990-1991, the State had the distinction of registering the highest deficit for any State in India. The causes were much the same as in other States: high wage bills, loss-making public sector undertakings and subsidies on social services, coupled with slow growth in revenues. But matters came to a head under SAD-BJP rule. Punjab raised salary levels to match the award of the Fifth Central Pay Commission. Simultaneously, the alliance wrote off water and power charges payable by farmers, along with outstanding house tax, land revenue and octroi dues.

Concessions of these kinds were taken to extraordinary lengths. Shortly after taking power in 1997, the SAD-BJP government introduced sales tax concessions worth Rs.443 crores each year. Some of these were withdrawn in January 2000 to comply with new national policies, but the State government still did not adopt agreed floor rates for commodities such as diesel, pesticides and fertilizers. A sum of Rs.250 crores was lost each year as a result. Individual units were granted concessions worth another Rs.300 crores. The proposed oil refinery at Bhatinda was given a sales tax exemption of Rs.15,000 crores over a period of 15 years, the highest exemption given to such a project in any State. Farmers were given free power for tubewells, which the Punjab State Electricity Board (PSEB) estimated has cost it Rs.2,000 crores each year. No real effort was made to cut costs elsewhere to make up for these concessions. Amazingly, expenditure on VIP security rose in peace-time Punjab from Rs.16.44 crores in 1991 to Rs.80 crores in 2000-2001. This figure does not include costs on account of vehicles and administrative expenses.

In 1996-1997, Punjab's gross fiscal deficit stood at 5.07 per cent of its gross state domestic product (SDP), against 2.9 per cent for all States. In the next financial year, that figure rose to 6.88 per cent, against 2.29 per cent nationwide. All of this came against a context of slow economic growth. For the period between 1993-1994 and 1997-1998, SDP here grew slower than nine other major States, including supposed problem cases such as Kerala, Orissa and West Bengal. For all but one year since 1992, Punjab's growth was less than the all-India average. According to the White Paper, capital formation in Punjab was also steadily below that of all-India levels. Despite its excellent infrastructure, studies conducted by the Confederation of Indian Industry (CII) and the World Bank in 2001-2002 concluded that the State only had a medium-level investment climate, behind Maharashtra, Gujarat, Tamil Nadu, Karnataka and Andhra Pradesh.

Uncontrolled government expenditure on itself seems to have been a key reason for the State's current financial crisis. Since 1996-1997, revenue expenditure on salaries, pensions and interest has exceeded revenue receipts. "During the decade of the 1990s," the White Paper records, "pensions grew ninefold while wages and salaries registered more than a fourfold increase." Kanwaljit Singh, Finance Minister during the SAD-BJP rule, has argued that this was largely because of the burden of Rs.15,000 crores imposed by the Fifth Pay Commission. He has also pointed out that the State government created 79,494 new jobs under direct or indirect Congress(I) rule between 1984 and 1997, while the SAD-BJP created just 2,240 jobs.

But simply blaming the Congress(I) does not address the issues raised by the White Paper. For one, Punjab government employees have been consistently given wages higher than those recommended by Central pay commissions, and get better salaries than their counterparts in Haryana or the Union government. Between 1990 and 2000, there was also a sharp increase in the number of government employees getting Grade A wages, while the number of those receiving Grade B wages declined. No real consideration seems to have been given to the financial consequences of these upgrades. Similar inflation was evident at the highest levels of the bureaucracy. Between 1984 and 1998, the number of Indian Administrative Service officers serving the State increased from 165 to 206. Where Punjab once had eight Inspectors-Generals of Police, it now has 16 Directors-General, each with their complement of subordinate staff and office facilities.

Failure to generate revenues to meet these expenses has had a direct impact on capital expenditure. "Capital outlay as a proportion of gross state domestic product," the White Paper notes, "has remained consistently below 2 per cent, with levels less than 1 per cent in a number of years. On the other hand, the composition of revenue expenditure has shifted from the productive sectors and in favour of general services." Development expenditure, which the White Paper defines as the sum of expenditure on social and economic services, declined from 65 per cent of revenue expenditure in 1990-1991 to just 45 per cent in 1999-2000. The rest has been spent on interest payments, pensions and the police, in that order. In real terms, Plan expenditure has not grown since 1990-1991, and is now financed entirely through borrowing.

Uncontrolled borrowing has also undermined the strength of Punjab's PSUs. On March 31, 2001, the 39 PSUs and cooperative institutions had borrowed Rs.4,864.25 crores from the government, and Rs.19,464.95 crores from other sources. Of this amount, Rs.18,707.12 was guaranteed by the Punjab government, which will have to meet payments in the event of the PSUs defaulting. Although the Punjab government had demanded a return of 4 per cent on its investment in the PSUs, only six have so far paid a dividend. On its investment of Rs.3,300 crores in PSUs and cooperative institutions, Punjab has received just Rs.8.40 crores. The Congress(I) is now considering a programme of disinvestment, but job losses are unlikely to go down well in a context where both State and private sector employment opportunities have been declining in recent years.

SAD politicians are right when they say that many of these problems date back to Congress(I) rule. The PSEB, which made a modest profit from 1994 to 1997, went into the red under the SAD-BJP government after the free power scheme was introduced in 1997. In 1999-2000, the PSEB's cash deficit was as high as Rs.910 crores. Debts to institutional lenders increased from Rs.738 crores at the end of March 1992 to Rs.4,396 crores at the end of March 2001. Interest payments jumped from Rs.92.13 crores to Rs.694.67 crores during the same period. None of these funds had been used to increase capacity, which means that Punjab could face a serious power deficit in the not-too-distant future. The PSEB, the White Paper records, "is in a debt trap where its borrowings during the year are not quite adequate to cover the outflows on interest and repayments".

No effort was made by the SAD-BJP government to streamline the PSEB's working to compensate at least partly for the enormous stresses placed on the organisation. The March 2001 Report of the Comptroller and Auditor General points out that the PSEB has the highest number of employees per thousand customers, and employees per million units of power sold. These ratios, the CAG noted, had been consistently higher than the national average from 1994-1995 onwards. Overstaffing and poor management have been responsible for a similar crisis in other major Punjab PSUs. Punjab Roadways' losses, for example, increased from Rs.28.59 crores in 1991-1992 to almost four times that figure in 2000-2001. The Pepsu Road Transport Corporation is even worse off, unable to pay taxes worth Rs.131.26 crores to the government.

How these problems might now be addressed, no one seems to know. In his response to the White Paper, Kanwaljit Singh argued that "the Congress party itself, in full knowledge of the financial position of Punjab, goes on to promise its own sets of concessions to the tune of Rs.1,200 crores." The Chief Minister had promised a bonus of Rs.30 a quintal for paddy procured under the SAD government in 2001, and was pushing for a minimum support price of Rs.700 a quintal for wheat to be purchased in the coming weeks. Amarinder Singh has made it clear that he does not envisage any drastic cuts being made in the support price, pointing out that debt-hit small and medium farmers simply cannot take the shock of subsidies being withdrawn. He has also promised a yellow card scheme to improve food access for the poor, and the institution of some 3.5 lakh scholarships.

Senior bureaucrats insist that expenditure on new schemes, along with that on the existing subsidies, can be paid for by improving tax collections and cutting back on wasteful expenditure. Sources say that the government is considering re-imposing octroi, cutting back on free power supply at least for the larger farmers, and increasing power tariffs across the board. It is unclear, however, if these measures will be adequate to meet the crisis. For decades, governments in Punjab have squandered the gains of the Green Revolution, making little effort to spur agricultural diversification or encourage industry. The State's poor record in the social sector, notably its appalling education levels and poor sex ratio, bear witness to the fact that economic progress has not driven meaningful social change either. Unless the new Chief Minister can shape a comprehensive agenda to transform Punjab's economy, the State's slow backward slide could continue unchecked.