Can Manpreet Badal’s fiercely fiscal conservative zeal succeed in putting Punjab on the path of fiscal responsibility?
His moves aren’t popular but they are the bitter medicine ailing Punjab’s finances need.
It’s been little more than a year since the Congress party under the leadership of Captain Amarinder Singh rode to power in Punjab with a thumping majority, trouncing the Akalis who had been ruling the state since 2007. By winning a second consecutive term in 2012, Shiromani Akali Dal (SAD) surprised electoral pundits as Punjab’s populace isn’t known to be merciful to incumbents. During the 2017 campaign, the opposition put the menace of drug use in Punjab front and centre, blaming it not merely on the misgovernance of Akalis but alleging their active involvement in exacerbating it. But as soon as the election got over, so did the drug problem - at least that’s the post poll coverage of the issue in the media indicates.
Either the drug problem was too easy to solve or it was exaggerated, but the fact is highly complex issues don’t get resolved overnight. We have to look no further than Punjab’s financial situation to support our case. It’s in dire straits. And it will take years and a lot of political will to salvage it. The only person who raised the issue relentlessly during the campaign is Manpreet Singh Badal, the current Finance Minister. Not just in the campaign, Badal has been talking about the need for Punjab to course correct on fiscal discipline for over a decade now. That’s what his priority was during his first stint as Punjab’s finance minister from 2007 to 2010. But the father son Badal duo wanted to win election again and Manpreet’s fiscal prudence was coming in the way of their populism. Manpreet lost his job. Badals won. Punjab lost.
Now, Manpreet has got a second chance, a rare opportunity, this time in a Congress government, to rescue Punjab from going the way of bankruptcy or at the very least to undo the damage done in the last few years. In his two budgets so far, he has shown a clear intent to do whatever it takes. But before discussing the steps he is taking, it is pertinent to take a stock of the legacy, or mess if you will, he inherited which featured prominently in the white paper he brought out soon after assuming charge and before presenting his first budget in June last year.
First, Punjab’s declining economic growth was a cause of concern. It used to be among the fastest growing states in the country, but has become a laggard now. It’s gross state domestic product (GSDP) growth rate has plummeted from a high of 10.18 per cent as against the national average of 9.57 per cent in 2006-07 to 5.93 per cent as against the national average of 7.10 per cent in 2016-17. States like Bihar, Madhya Pradesh and even neighbouring Haryana have posted much higher growth rates than Punjab in the last 10 years. In per capita income, Punjab has lost the top slot and now stands at seventh position.
Second, the state’s treasury was in dire straits. The balance for current revenues (BCR) of a government is calculated as revenue receipts minus revenue expenditure. This amount is a proxy for the government’s ability to spend on development after meeting its routing expenditures. Punjab’s BCR stood at - Rs 4,488 BE in 2016-17. Yes, in the negative, meaning, that its revenue expenditure far exceeded its revenue receipts and the state’s borrowings went into financing these routine expenditures instead of funding development work. BCR in 2006-16 was a healthy Rs 2,252 crore.
Third, the state government faced liquidity crunch on 269 days in 2016-17 financial year which shows the terrible fiscal health of Punjab. Out of these 269 days, the state was under ways and means advances (WMA) for 165 days and under overdraft for 104 days. The Reserve Bank of India (RBI) being the banker to state governments provides financial cushion of a certain amount (Rs 925 crore in the case of Punjab) to them to meet financial obligations whenever they are short on cash. The central bank charges interest rate equal to repo rate for such advances. Once even this amount is exhausted by the state government, its treasury goes into overdraft, where a higher interest rate than repo rate is charged by the RBI for each day. But Punjab’s fiscal health was so bad that even these two options didn’t suffice and the central bank had to stop honouring Punjab government’s cheques last year - a massive embarrassment for the proud people of the state.
Fourth, thanks to years of fiscal mismanagement, the first immediate task that stared in the face of the new government was to discharge the pending liabilities to the tune of Rs 13,000 crore - a staggering amount for a state like Punjab. It had not released Rs 2,437 crore towards various grants or loans received from the Centre. It owed Rs 1,747 Crore to various procurement agencies, which on their own had themselves arranged the funds to implement state government’s Atta-Dal Scheme where subsidised wheat and rice is provided at Rs 2 per kilogram and Rs 30 per kg respectively. The state government had not paid Rs 2,773 crore towards increment in dearness allowance of employees. It didn’t pay out the power subsidy amount of Rs 728 crore. In addition to these, liabilities worth Rs 7,791 crore were pending towards salary arrears, retirement benefits, office expenses, etc as the government simply didn’t have the money in treasury to meet these expenses.
Fifth, the state government’s ability to raise revenue internally had been worsening over the years. State’s own revenue as share of total revenue had gone down from 77.34 per cent in 2006-07 to 68.50 per cent in 2016-17 mainly on the account of a big jump in share of central taxes from 9.32 per cent to 21.14 per cent in the same period. To put this in perspective, in neighbouring Haryana, the state’s own revenue as share of total revenue stands at 78 per cent.
Sixth, Punjab’s capital expenditure to revenue expenditure ratio, which was never great to start with, had also become worse in the last decade. Revenue expenditure as share of total expenditure increased from 88 per cent in 2006-07 to 92 per cent in 2016-17, leaving very little room for the much needed public investment in building capital assets that would spur growth. The neighbouring Haryana fares much better with revenue to capital expenditure ratio of 74:26 (2018-19-BE)
Seventh, salaries and pensions have always been a headache for any government in Punjab. No one has been able to tame this menace. Eighty five per cent of total revenue receipts went into financing the total committed liabilities of the state government which includes pensions, salaries and interest payments, which is testament to runaway populism in the state. The situation has been made worse in the last 10 years with expenditure on salaries rising by 242 per cent, on pensions by 359 per cent and on interest payments by 143 per cent.
Eighth, the state’s debt liability as percentage of GSDP stood at 31.60 per cent. It has come down from 40 per cent in 2006-07 but is still not low enough. It is way higher than the stipulated limit of 25 per cent prescribed by the 14th Finance Commission for the states. Haryana’s debt as percentage of GSDP in the same year was 22.85 per cent. Punjab is spending way too much money on debt servicing. Since, its revenue expenditure has consistently stayed over and above the revenue receipts in nine out of last 10 years, it means that the state is borrowing to meet its revenue expenditure, instead of spending it on building infrastructure or creating assets for future, which can generate revenue and pay it back in the form of higher growth. The current quality of expenditure is not sustainable.
Ninth, the history of previous year budgets show the state government in poor light. Year after year, the government has been unable to put out realistic figures and one finds mismatch in revenue estimates and expenditure figures. Since 2007-08, Punjab’s treasury has fallen short of revenue estimates by as much as 10 to 18 per cent. In 2016-17, budget estimates put revenue receipts at Rs 50,181 crore while the actual figure was Rs 4,773 crore short. Similarly, capital expenditure in budget estimates is shown way higher than what it actually turns out to be.
Tenth, key economic indicators, though not alarming by standards of the state governments, do not inspire confidence. In 2017-18 revised expenditure (RE), revenue deficit as percentage of GSDP was 3 per cent, fiscal deficit at 4.36 per cent and primary deficit at 1.18 per cent. The situation was much worse in the preceding year.
Apart from these obviously problematic trends, the white paper alleges that the previous Akali government abused various entities under its ownership to indiscriminately raise loans ‘by mortgaging their future revenues or by hypothecating immovable properties at their disposal’ details of which are shown in the table below.
These loans ‘provided a handy window to fund the populist programs of the then ruling dispensation’, noted the white paper, and called for a special audit ‘to ascertain as to whether the loans so raised have been properly accounted for and their utilisation is in accord with the statutory mandate of these entities and is in keeping with the principles of financial propriety and prudence.’
Additionally, the paper accused the previous government of indulging in ‘smart’ accounting practices and art of book cooking by fast-forwarding the receipts, deferring expenditure, not accounting for contingent liabilities in the budget and incurring off-budget liabilities thereby hurting the integrity of budgets and credibility of the state government as an institution.
Hence, given the way finances of the state were managed, the paper said that financial position as ‘reflected in its various budgetary documents cannot be taken on its face value’. For 2016-17, the paper presents the results of a truing up exercise that was carried out and mismatch is indeed troubling, to say the least, as shown in the figure below.
So what is Manpreet Badal doing? If 2018-19 budget estimates are any indication, he intends to put Punjab on the path of fiscal prudence.
First, revenue deficit as percentage of GSDP is estimated to come down to 2.42 per cent from 3 per cent.
Second, fiscal deficit as percentage of GSDP is estimated to come down from 4.36 to 3.81 per cent.
Third, primary deficit as percentage of GSDP is estimated to be brought down to 0.67 per cent from 1.18 per cent in previous year.
Fourth, state’s own tax revenue is estimated to go up to Rs 41,064 crore from 35,490 crore in 2017-18 (RE), an increase of over 15 per cent compared to usual annual increment of 4-5 per cent during Akali rule.
Fifth, Badal also has hinted at bringing down expenditure on salaries, wages, pensions, retirement benefits as percentage of total revenue receipts from 63.57 per cent in 2016-17 to 48.79 per cent in 2018-19 (BE). If he ends up achieving this, it will be a huge achievement.
Sixth, total outstanding debt as percentage of GSDP is also estimated to come down marginally from a high of 42.09 per cent in 2016-17 to 40.82 per cent in 2018-19 (BE).
The above trends, if they hold, portend well for Punjab.
Only time can decidedly tell if Manpreet Badal succeeds in putting Punjab on the path of fiscal responsibility by his fiercely fiscal conservative zeal. In his two budgets, he has certainly shown the way. His moves aren’t popular but they are right. Badal is inducing bitter medicine. If the treatment is allowed to be taken to conclusion, Punjab can hope to bring back its acche din.