Guest column | Audit can wait, fix Punjab’s political economy

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Punjab Chief Minister Bhagwant Mann recently tweeted: “We will have the public debt of the state audited to determine if it has been misused, determine responsibilities and recover those responsible. The assertion of this article is that such an audit will be useless without determining the extent of the public debt; why it takes on the current proportions, how it was used and from whom to collect it.

No audit is necessary to answer these questions. What is needed is the ability to read what is written on the wall and muster the political will to take corrective action. In fact, the recently submitted report of the 6th Finance Committee has two chapters dealing with the economy and state finance, which comprehensively addressed the issue of debt sustainability. Hopefully, the state government would have now received the report from the Governor of Punjab and process the same to present it to the state legislature as required by Article 243 of the Constitution. Without disclosing the recommendations made by the State Finance Committee, we will attempt to answer some of the important questions raised by the CM’s tweet.

The State’s public debt recorded an exponential increase of 83,099 crores in 2011-12 for a huge 2,58,011 crore at the end of 2020-21, a 211% increase over 10 years, or an average annual increase of more than 21%, compared to an average annual growth of 13.6% in the nominal gross domestic product of the State (GSDP). At the end of 2021-22, the State’s public debt would have reached $3 million. Even though the government’s books underestimate the magnitude of the public debt, the state leads all major states in the country in terms of debt burden per capita and debt service per capita.

The books of the government do not represent about a million dollars of secured or unsecured loans that its public sector companies make on their books. The official figure also does not take into account deferred and unfunded liabilities totaling several thousand crores. For example, electricity subsidy arrears and liability arising from the full implementation of the recommendations of the 6th Punjab Remuneration Commission. All told, Punjab’s debt-to-GDP ratio may have already exceeded 60%. One may hasten to add that the government’s debt burden has been compounded due to the UDAY program and the financing of the accumulated gap in the cash credit limit. Therefore, as a first step, the government should assess the correct size of public debt and put in place appropriate disclosure standards to remove the vagueness around this important public finance measure.

How we got here

It is not the story of a year or five years or of a government or two. Over the past three decades, successive state governments have lived beyond their means, running up mounting debts and deficits. During this period, the state evolved towards an extractive political economy and moved from a ‘development state’ to a ‘security state’. Competitive populism and high government ownership costs have unsustainably broadened the spending base and sub-optimal exploitation of resource potential has reduced the state government’s resource pool, resulting in a precarious situation at which he faces today. In this story, state taxation suffers from a deep structural malaise. He will not leave while waiting or seeking financial assistance from the central government. If this strategy hasn’t worked for the past three decades, it won’t work now. It calls for a change of direction, as you cannot search for a new destination while running in the same direction.

Use of debt

Development economists tell us that deficit financing can help accelerate the pace of growth, provided it is used to create productive assets or build human capital. On the contrary, the government of Punjab has taken out huge loans, year after year, and used them to bridge an ever-widening gap between its income and expenditure. At present, all of its gross borrowings are used either to repay old borrowings or for interest on them. Most state revenues are spent on salaries, pensions, grants, and the day-to-day running of government. If the central government had not re-greened its debt, the state government would have long since defaulted on debt service. No wonder the state, which was once known for the highest growth rate and highest income per capita, is now known for having the highest debt per capita and the lowest capital expenditure per capita from the country.

From whom to recover

After having the public debt audited, the Chief Minister also promised to recover the misused amount. But from whom will the recovery take place? Government employees and pensioners, gift recipients or lenders, as most of the outstanding debt has been used for salaries and pensions, grants and debt service. Therefore, auditing public debt and determining responsibility for misuse is nothing but red herring. The real problem is the economy and the finances of the state which are practically on the brink.

The path to follow

It is not anyone’s business that such a deep economic and fiscal decline can be dealt with in a short time and, that too, without the help of the central government to give it a break. The Punjab government should engage the services of a professional agency to draw up a medium-term restructuring program to restore the economic and fiscal health of the state and present it to the state legislature for approval. Once approved, its implementation may be subject to ongoing review by a cabinet committee headed by the Chief Minister. As it will involve sacrifices on the part of all stakeholders, such a plan should also be properly communicated and marketed to the general public, who is the ultimate stakeholder.

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The author is Chairman of the Punjab Finance Commission and former Chief Secretary of State. Opinions expressed are personal


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