Monday, October 18

Why Punjab can’t afford pork

Punjab has been playing bad economics for long, P Raghavan writing in The Indian Express cites figures to show that score-sheet reflects poorly on those governing the state
Clashes between powerful politicians over policy is not unusual, but the fight between Punjab’s former Finance Minister Manpreet Badal and his party on the issue of curbing wasteful spending on populist schemes stands out. It’s rare for Indian politicians to stand up against political largesse or pork-barrel politics as the Americans call it. Growing subsidy bills and debt burdens, issues raised by Manpreet Badal, are usually low-priority matters.
But the big question is: how has Punjab’s profligacy impacted its debt burden and fiscal management? Long-term trends show that the Shiromani Akali Dal government has been lax about containing expenditure, and pushed up the state’s deficits. For instance, the numbers show that during the third stint of the Parkash Singh Badal government, the revenue deficit shot up from Rs 1,485 crore in 1997-98 to Rs 2,336 crore in 2000-01. However, Amarinder Singh’s Congress government that replaced Badal’s was more restrained in its spending. The revenue deficit even declined from Rs 3,781 crore in 2001-02 to Rs 1,749 in 2006-07. But the gains made were reversed sharply in the fourth stint of the Badal regime when the revenue deficit of the state doubled in just three years from Rs 3,823 crore in 2007-08 to Rs 6,234 crore in the budget estimates for 2009-10.
The deteriorating trends in the revenue deficit under SAD rule is also reflected in the fiscal deficits. While the fiscal deficit almost doubled from Rs 2,478 crore to Rs 4,958 crore during the term of the third Badal government in 1997-2002, the Congress government during 2002-07 pushed down the deficit from Rs 4,401 crore in 2002-03 to Rs 4,384 crore in 2006-07. And the fourth Badal government has been even more profligate, with the fiscal deficit doubling in just three years from Rs 4,604 crore in 2007-08 to Rs 9,660 crore in the budget estimates for 2009-10. All this has pushed up the total borrowing of the state to Rs 64,924 crore by early 2010, and the amount is expected to go up by another Rs 5,700 crore in the current fiscal year.
One reason for the growing deficits in Punjab is the poor resource mobilisation efforts. The tax-to-GDP ratio of the state is just 7 per cent, mainly because of the small industrial base. The share of the industrial sector in the state economy is just 13 per cent. Resource mobilisation efforts will only get a boost once the GST rollout allows the state to tap into the huge consumption spending in the state.
However, apart from the sins of omission there are also the sins of commission, which place a large burden on the state. The biggest outgo is on the electricity subsidies in agriculture, where the expenditure has gone up from Rs 2,602 crore in 2008-09 to Rs 3,144 crore in 2009-10, which accounts for almost half the revenue deficit of the state. The reason for such a large electricity subsidy bill is the zero tariff for electricity used for agriculture which accounts for close to a third of the total electricity consumption in the state. The agriculture tariff charged in Punjab stands out in stark contrast to the Rs 3.68 per unit charged as agriculture tariff by the neighbouring state of Himachal Pradesh.
The direct consequence of the growing deficit is the bloated debt burden of Punjab which is now far beyond the 30.8 per cent target fixed by the Twelfth Finance Commission. Most recent numbers show that the debt GSDP ratio of the state was 40 per cent in 2008-09, which far exceeds the all-state average of 26.2 per cent and more than double of that of neighbouring Haryana.
A further increase in debt levels would only further squeeze the resources now available for development programmes and widen the growing gap between Punjab and other states. Most recent numbers show the state’s growth rate has hovered around 7per cent, far below that of the leading states, which grow in double digits. So a reallocation of state resources by cutting down unproductive expenditures should now be the first step.
But despite spending far beyond its means, the state has fallen short of meeting the annual plan targets. By the chief minister’s own admission, the actual expenditure of the plan outlay by the state fell from 98 per cent in 2007-08 to just 58 per cent in 2009-10, mainly due to the large outgo on the implementation of the Pay Commission recommendations and the slowdown in the economy which impacted revenues from the real estate sector and the vat collections.

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