The most surprising economic news of the Fiscal Year 2022, shocking for many economists and experts, was the financial crisis and bankruptcy of the Sri Lankan economy. This beautiful small island hit the headlines for being in an economic disaster wherein the Lankan government cannot pay off its sovereign debts and even interest thereon.
The economic downturn has led to unprecedented inflation, wiping out the savings of the public and shortages in essential supplies and a host of other effects like civil unrest, political instability, etc.
Experts on public finance and government expenditure presumed that the Sri Lankan economic disaster was bound to happen. Many experts had anticipated and predicted this disaster, though they never agreed on the exact timings of the occurrence of this economic crisis. It was a man-made disaster where the plans and policies followed by the ruling dispensation headed straight to the pitfall of sovereign bankruptcy.
If you ask for one reason for this crisis, the answer will be the excess government spending over its revenue. However, the prime reasons were debt-led growth leading to a debt crisis and investing in economically non-viable sectors. The other profound reason was reckless populist measures taken by the Sri Lankan government for political reasons. The crisis is colossal and the leaders of governments, both federal and state, must learn lessons from this avoidable crisis.
Ironically, instead of learning from this debt crisis, many Indian states are following a path which can be detrimental to the economic health of the states and may lead to the Sri Lankan way.
Let us analyse the state of Punjab, whose economy is in the doldrums, particularly after the spree of economic dolls and uneconomic populist decisions by the new political dispensation in March 2022.
Punjab, the bread-basket of India, enjoyed the status of being the richest state of India in terms of per capita income for almost 2 decades, thanks to the Green Revolution. But in the last two decades, Punjab has seen its worst economic days, which have multiple causes with multiple and cascading effects. Ironically, instead of learning from the Sri Lankan crisis, Punjab is heading the Sri Lankan way.
In ideal conditions, government expenditure is generally more than its total income in a welfare state like India and its state constituents. But, the ratio of excess spending should not be more than a particular limit as it will force the government to borrow to meet its expenditure. This leads to a debt trap which is a situation where the government has to take loans to pay off even interest on these mounting loans.
As per the public statement of the Finance Minister of Punjab, the economy of Punjab is painting a state of classical debt trap where the state’s outstanding debt is projected to increase from 2.83 to 3.05 lakh crores in F.Y. 2022-2023. Punjab has a per capita debt of 1 lakh rupees, making it one of the worst managed economies among Indian states.
Some of the financial parameters of Punjab, a highly indebted state, for instance, are similar to Sri Lanka’s. Punjab’s debt-to-GDP ratio is now the highest in the country at 53.3%, in contrast to the ceiling of 20% as agreed by the Centre and states of India. It means the debt of Punjab is more than 50% of the total monetised value of production in Punjab in a year.
The major reason for the Lankan crisis was reckless expenditure on freebies. Punjab is treading the same path. Imagine a debt-ridden person borrowing just to pay the mounting interest is not only borrowing more but spending much more than its income and even waiving off its sources of income in terms of tax cuts!
This is exactly what is happening in Punjab. Despite the economy in a shambles, the AAP government is offering concessions and rate cuts. The total power subsidy in the current FY is Rs 24,886 crore which includes 15,845 crore as a freebie on account of 300 units of power per month for free from July this year. The government has borrowed Rs 8,000 crore in 2 months just to pay interest on old loans.
Punjab ranked first in GDP per capita amongst Indian states in 1981 which declined to fourth in 2001, but has experienced slower growth than the rest of India, having the second-slowest GDP per capita growth rate of all Indian states and UTs between 2000 and 2010, behind only Manipur. In 2019-20, Punjab, India’s once most prosperous state, drifted down from its rank 17 to rank 19 in terms of per capita GDP.
In its spree of populism,
Sri Lanka chooses not to increase tax revenue. The same is the case with Punjab. Ironically, no new tax has been announced in the budget 2022. Out of the total revenue receipts of 95,378 crore, 20,550 crore are estimated to come from GST, 6,250 crore from VAT and 9,647 crore from state excise. How can a government survive without increasing its revenue?
The creation of state assets is one way to earn the state’s income through capital expenditure. Punjab’s investment in capital expenditure is one of the lowest in the country. With the bulk of the state’s borrowings going into debt servicing, Punjab has one of the lowest capital expenditures. Payment of salaries, interest payments, pensions and retirement benefits all committed liabilities, continue to be a worry for the state government.
Of the revenue expenditure of 107,932 crore proposed in the budget, 66,440 crore, i.e. 61.56%, is the committed expenditure. The state’s committed liabilities are among the highest in the country. Further, like in Sri Lanka, the AAP government is spending on uneconomic areas. Interestingly, in 2 months, the AAP government has spent Rs 37 crores on just advertisements.
The economy of Punjab is on a ventilator. It needs a miracle and not a whitewash. It is high time that the AAP-led government took drastic measures to reduce the fiscal deficit and contain its freebies to bring the economy of Punjab on the path of recovery.
(This piece is taken with gratitude from India Today)
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