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

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

Auditing public debt and fixing responsibility for misutilisation is nothing but a red herring. The real issue is the economy and state finances that are virtually in an abyss

Punjab chief minister Bhagwant Mann recently tweeted, “We will have public debt of the state audited so as to ascertain if it has been misused, fix responsibility and make recovery from those responsible.” The contention of this write-up is that such an audit will serve little purpose without ascertaining the magnitude of public debt; the reasons for its assuming the current proportions, how it’s been utilised and from whom to make the recovery.

No audit is required to answer these questions. What is required is the ability to read the writing on the wall and muster the political will to take corrective steps. In fact, the recently submitted report of the 6th finance commission has two chapters dealing with the state economy and finances, which have exhaustively dealt with the problem of debt sustainability. Hopefully, by now the state government would have received the report from the Punjab governor and would be processing the same for presenting it to the state legislature as required by Article 243 of the Constitution. Without disclosing the recommendations made by the state finance commission, we will try to answer some of the important questions arising out of the CM’s tweet.

Public debt of the state recorded an exponential increase from 83,099 crore in 2011-12 to a whopping 2,58,011 crore at the end of 2020-21, an increase of 211% over 10 years, spelling into an annual average increase of over 21%, against an annual average growth of 13.6% in the nominal gross state domestic product (GSDP). By the end of 2021-22, the state’s public debt would have touched 3 lakh crore. Even though books of the government understate the magnitude of public debt, the state tops all major states of the country in per capita debt burden and per capita debt servicing.

The government books don’t account for about a lakh crore of guaranteed or non-guaranteed loans its public sector undertakings are carrying on their books. The official figure also does not reckon deferred and unfunded liabilities adding up to several thousand crores. For example, arrears of power subsidy and liability arising out of fully implementing the recommendations of the 6th Punjab Pay Commission. All inclusive, Punjab’s debt to GSDP ratio may have already crossed 60%. One may hasten to add the state’s debt burden was compounded due to the UDAY scheme and funding the accumulated gap in cash credit limit. Therefore, as a first step, the government should assess the correct magnitude of public debt and put in place appropriate disclosure norms to remove fuzziness around this important metric of public finance.

How we got here

This is not a story of a year or five years or of a government or two. Over the past three decades, successive state governments have been living beyond their means, incurring ever-ascending ascending debts and deficits. Over this period, the state evolved into an extractive political economy and morphed from a ‘development state’ into a ‘security state’. Competitive populism and high carrying cost of the government have unsustainably expanded the expenditure base and sub-optimal exploitation of the resource potential has shrunk the resource pool of the state government, resulting in a precarious situation, it faces today. In this telling, the state’s fiscal suffers from a deep structural malaise. It will not go away either by waiting out or by seeking financial assistance from the central government. If this strategy has not worked over the last three decades, it is not going to work now. It calls for a directional change, for you cannot seek a new destination, while running in the same direction.

Utilisation of debt

Development economists tell us that deficit funding may help accelerate the tempo of growth, provided it is used for creating productive assets or enhancing the human capital. Contrarily, the government of Punjab has been contracting huge loans, year after year, and has been using them for meeting an ever-increasing gap between its revenues and expenditure. At present, its entire gross borrowings are being used either to repay old loans or interest thereon. Most of the state’s revenues are spent on salaries, pensions, subsidies and day-to-day running of the government. Were it not for the central government ever-greening its debt, the state government would have defaulted in debt servicing a long time ago. No wonder, the state, that was once known for the highest rate of growth and highest per capita income is now notorious for being the highest per capita debt and lowest per capita capital expenditure in the country.

From whom to recover

After getting the public debt audited, the chief minister also promised to recover the misutilised amount. But from whom will the recovery be effected? From government employees and pensioners, from beneficiaries of freebies or lenders, as most of the outstanding debt has been utilised for salaries and pensions, subsidies and debt servicing. Therefore, auditing public debt and fixing responsibility for misutilisation is nothing but a red herring. The real issue is the economy and state finances that are virtually in an abyss.

The way forward

It is nobody’s case that such a deep economic and fiscal decline can be addressed in a short time and, that too, without the central government’s help in providing the breathing space. The government of Punjab should engage the services of a professional agency for drawing up a medium-term restructuring programme for restoring the economic and fiscal health of the state and present it to the state legislature for approval. Once approved, its implementation may be continuously reviewed by a cabinet committee helmed by the chief minister. As it will involve sacrifice on the part of all stakeholders, such a plan should also be appropriately communicated and marketed to the public at large, being the ultimate stakeholder.

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