Of subsidies and debt: A look at Punjab’s key economic issues

Successive governments in Punjab have doled out subsidies ranging from farm loan waivers to free electricity.

India’s farmers have hit the streets again demanding higher minimum support price (MSP) for their crops. Many of them belong to the state of Punjab, popularly known as the nation’s bread basket. As the agitation continues, Moneycontrol looks at some of the key economic metrics of this northern state.

Agriculture

About 75 percent of Punjab’s population directly depends on agriculture, with the state majorly growing crops such as wheat and rice.

While the service sector’s contribution to the state’s gross state domestic product (GSDP) is the highest at 45.91 percent, agriculture takes second place, at 28.94 percent as of FY23. However, the farm sector still plays a dominant role in the state’s GSDP compared to its contribution of 18.11 percent on an all-India basis.

A look at the agricultural policies of the state is required given the ongoing protest, wherein farmers are primarily demanding a law guaranteeing the MSP for their crops. The MSP, which is the cost at which the government purchases crops from farmers, provides them with an assured income for their produce amid market uncertainties.

The overall allocation for agriculture and allied sectors was pegged at Rs 13,888 crore (in the state budget) for FY 2023-24, which is 20 percent more than last year. This is 10.2 percent of its expenditure towards agriculture, and higher than the average outlay by states (5.8 percent), according to PRS Legislative Research.

For long, there has been a debate surrounding the need for Punjab to diversify its crop base. Successive state governments have acknowledged this as well.

In its 2023-24 budget, while listing out the steps taken by the state to diversify agriculture, including the promotion of the direct seeding of rice and procurement of moong, the government said that more will be done to push this aim.

The state government then announced market intervention for basmati procurement, 33 percent subsidy on cotton seeds, and an initial allocation of Rs 1,000 crore for a special scheme on diversification in the current fiscal.

Further, Punjab’s depleting groundwater levels make the need to diversify imperative. Groundwater helps small farmers cultivate and irrigate their land and provides insurance against drought.

Highlighting their concerns in a fact sheet in 2023, the Central Ground Water Board (CGWB) urged farmers in the state to diversify from paddy and other water-guzzling crops to maize and sunflower.

However, experts believe that the existing policy regime of subsidies and procurement practices of the state may discourage farmers from moving towards more water-resistant crops.

An ICRIER report in July 2023 said, “Business-as-usual input and output support policies of free or subsidised groundwater extraction, minimum support price for water-guzzling crops, and subsidised urea (that cause groundwater pollution and GHG emissions) are not sustainable. GHG stands for greenhouse gases.

Subsidies
Successive governments in Punjab have doled out subsidies ranging from farm loan waivers to free electricity.

A significant portion of the state’s revenue expenditure of Rs 1,23,441 crore for FY24, an increase of 5 percent over the revised estimate of 2022-23, includes spending on salaries and subsidies.

The current Aam Aadmi Party-led government, in honour of its pre-poll guarantee of providing 300 units of power free every month to all households, made a provision of Rs 7,780 crore in its FY24 budget.

Apart from this, the state also provisioned Rs 9,331 crore to provide free electricity to farmers, and Rs 3,133 crore was proposed to be provisioned in FY 2023-24 for subsidised power to industrial units situated in the state.

The CAG noted that during 2017-22, power subsidies in Punjab constituted a major portion of the total subsidies, ranging between 68 and 99 percent. During the same period, subsidies have been about 56 to 102 percent of the revenue deficit, an analysis from PRS Legislative Research showed.

The previous Congress regime, in June 2017, announced a farm loan waiver of up to Rs 2 lakh crore, of which Rs 1,200 crore is yet to be paid, according to the current state government’s claim in June 2022.

India’s central bank has time and again flagged concerns over the higher subsidy spends of some states.

“Some states have budgeted for fiscal deficits exceeding 4 percent of GSDP in 2023-24, as against the all-India average of 3.1 percent. They also have debt levels exceeding 35 percent of GSDP, as against the all-India average of 27.6 percent. Any further provision of non-merit goods and services, subsidies, transfers, and guarantees will render their fiscal situation precarious and disrupt the overall fiscal consolidation achieved in the last two years,” the Reserve Bank of India said in a study in December 2023.

Debt
Punjab's fiscal deficit is estimated to be nearly 5.0 percent of GSDP in 2023-24. While this is lower than the previous fiscal’s 5.2 percent, it is significantly higher than the initial projection of 3.8 percent. In both these years, the fiscal deficit has been higher than the limit permitted by the central government, which was 4 and 3.5 percent, respectively, for FY23 and FY24.

Punjab has one of the highest debt levels among Indian states. At the end of 2023-24, its outstanding liabilities are estimated to be 46.8 percent of GSDP.

Acknowledging these concerns, the current government, while presenting the budget for FY24, said that Rs 15,946 crore was repaid as principal and Rs 20,100 crore as interest due to the debt taken by the previous regime during the previous fiscal. In the ongoing financial year, Punjab will be paying Rs 16,626 crore as principal and Rs 22,000 crore as interest.

The state has been taking several steps of late to bring fiscal prudence, including notifying a Tax Intelligence Unit to plug evasions, and delegating expenditure authorisations to line ministries instead of the finance department in a bid to remove bottlenecks.

Beyond the piling power subsidies and a fiscally expensive farm loan waiver, the unemployment rate in Punjab, at 6.4 percent, is higher than the national average of 4.1 percent, as per the Periodic Labour Force Survey (July 2021-June 2022).

Now that the MSP agitation is back in focus, with participants from a state that was at the forefront of India’s green revolution in the 1960s, experts believe that instead of fiscally profligate policies, the push should be towards diversification.

“Punjab's delay in pursuing diversification efforts by at least two decades poses a threat to future generations. The drastic decline in the water table, shrinking by over a meter annually, highlights the urgent necessity for diversification initiatives,” agricultural economist Ashok Gulati told news agency ANI.