Punjab’s electorate is no stranger to being wooed with freebies ahead of elections or being handed out generous subsidies by the government of the day. The state’s farmers, for instance, have been getting free power for years, which led to indiscriminate use of tube wells to extract water. Vulnerable households such as those below the poverty line or belonging to scheduled castes and backward classes have been getting 200 units of free power and industry subsidised power.
With fiercely competitive state Assembly elections due later this month, politicians have once again played the free goodies card. All such subsidies and freebies are not free, they are eventually billed to taxpayers.
Consider the promises made during the campaigning. The Aam Aadmi Party has promised a monthly income transfer of Rs 1,000 per month to all adult females if it is voted to power. The Congress has promised Rs 2,000 to all housewives while Shiromani Akali Dal has promised to transfer a similar amount to female heads of poor families.
Cost to exchequer: An example
Income transfer at Rs 1,000 per month to every adult female can cost the state’s exchequer Rs 12,000 crore a year. Can Punjab afford to hand out any more freebies such as free power to all households, free gas cylinder refills or a monthly income transfer to women? Let’s consider the state’s finances.
The state budget had estimated its total revenue receipts at Rs 95,257.60 crore, of which just Rs 37,434.04 crore were to come from its own tax revenues, primarily the state goods and services tax. About Rs 7,758.48 crore was to be collected as the state’s own non-tax revenues during the year.
Thus, the state expected just 39.3 percent of its total revenues in 2021-22 to come from taxes that it collected or own tax revenues as it is referred to in government accounting jargon. Taxes collected by the state include state goods and services tax, state value-added tax, stamp duty, state excise, tax on vehicles and electricity duties.
Punjab’s estimate of its own tax revenues in the total revenue receipts compare poorly with most states. At the all India level, own tax revenues were estimated at 46.2 percent of total revenues of all states and union territories.
Its own non-tax revenues were forecast at 8.1 percent of the total revenues. The source of own non-tax revenues includes interest, revenues from providing various services and lotteries.
Thus, just a little more than 47.4 percent of its total revenues were to be generated from own sources. A larger share or 52.6 percent were to be received from the Centre as state’s share in Union taxes and grants. These numbers show that the state is heavily reliant on transfers from the Centre.
Budget documents show that the state had estimated that it would receive Rs 38,038.36 crore in form of grants from the Centre including Rs 16,870.72 crore as GST compensation and another Rs 12,026.71 crore as a share in the taxes collected by the Centre. States’ share in taxes collected by the Centre is determined by the Finance Commission, normally every five years by applying the devolution formula.
What does revenue expenditure look like?
Compared to Punjab, all states and union territories had expected to generate about 54.5 percent of their revenues within their borders and receive 45.5 percent as transfers from the Centre.
Punjab had estimated its total revenue expenditure for the year at Rs 103,879.91 crore, which was Rs 8,622.30 crore or 9.1 percent more than its total revenue receipts from all sources. Its revenue expenditure included Rs 20,315.52 crore of interest payment on its mountain of debt and Rs 11,767 crore as pensions, both of which are non-developmental expenditures. The expenditure on salaries and wages was estimated at Rs 27,713.75 crore.
The state’s budget estimates for 2021-22 show that about 51.7 percent of its expenditure for the year was non-developmental in nature. The share of developmental expenditure was just about 44.4 percent. Developmental expenditure includes spending on health, education, agriculture, social security and welfare.
The state expected to spend Rs 13,117.28 crore on education and Rs 3,821.22 crore on health, the sum of which is far lower than the spending on interest payment. Its planned spending of Rs 12,465.19 crore on agriculture and allied services was just a little more than what it intended to spend on pensions.
The state’s own tax and non-tax revenues at Rs 45,192.52 crore were not enough to pay for Rs 46,102.42 crore of development expenditure, making it dependent on the Central transfers and borrowings. Budget documents estimated the state’s total outstanding debt at Rs 2.82 lakh crore. The effective outstanding debt, after excluding Rs 8,359 crore expected as GST compensation, was estimated at Rs 2.73 lakh crore – about 45 percent of the gross state domestic product.
Sops announced by various political parties, if implemented, could push the state further into indebtedness unless new sources of tax and non-tax revenues are found.
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