The Sixth Punjab Finance Commission (PFC) has recommended a five percentage point reduction in the debt-to-state gross domestic product (debt-GDP) ratio and annual targets of zero revenue deficit by the end of the year. fiscal year 2025-26 to ensure fiscal consolidation of the State.
The commission headed by former chief secretary KR Lakhanpal, which charted a fiscal consolidation path for the indebted state, suggested that the state government raise the debt-to-PISG ratio from 48.34 percent by the end of 2021-22 at GSDP 43.71. by 2025-26. It was also advised to set annual targets at its own level to achieve a revenue shortfall over the next four years and to derive its budget deficit from the borrowing limit set by the central government, people close to the government said. case.
The panel, which examined the increase in the state consolidated fund in addition to the decentralization of funds to local bodies and the imbalance that exists, had submitted its report to the Governor of Punjab Banwarilal Purohit on March 29 this year after that the Aam Aadmi Party (AAP) formed the government in the state. The commission’s report and suggestions, which have been kept secret until now, are important because the state has been in the grip of a severe financial crisis in recent years with a mountain of debt.
A finance ministry official said the report of the Punjab Finance Commission is being considered by the state government. The 15th Central Finance Commission had recommended that state governments expeditiously process the reports of the State Finance Commissions (SFCs) and present them to the State Legislature with a report on action taken and accept the recommendations made regarding the decentralization of funds.
Debt composition makes restructuring difficult
The outstanding debt amounted to ₹2.84 lakh crore at the end of revised estimates of 2021-22, which are expected to reach ₹3.05 lakh as per budget forecast for the financial year 2022-23. The commission pointed out that against an average annual growth of 13.66% in the state’s GSDP, its outstanding debt recorded an annual average of 21%. Another concern is the composition of the debt comprising commercial loans, provident funds, reserve funds and deposits, which makes it difficult for the state to seek debt relief or restructuring.
The state government will have to bear a heavy burden of interest and repayment every year for the next 10 years until 2029-30, sources said, citing the commission’s report to the state government. The AAP government, in a white paper tabled in the Punjab assembly on June 25, painted a bleak picture of state finances, which it says are in “freefall”. As the new government continued to borrow, the free electricity program and other announcements are bleeding the treasury dry, and salaries of government workers have also been delayed this month.
Use public assets to generate revenue
The commission recommended the use of large public assets owned by the Punjab government and its entities to generate revenue by enabling urban development authorities, municipalities and improvement trusts to capture land value appreciation by developing uniform policies for changing land use charges, development royalties, increasing FAR and offering tradable development rights. A separate Department of Investment and Management of Public Assets with the Chief Minister as Responsible Minister and the Chief Secretary as Administrative Secretary has been proposed with the mandate to create an inventory of public assets and their disposal optimally and the proceeds can be used to pay down expensive debt or to build productive public assets. Value Capture Finance (VCF), deployed by some progressive states, has been suggested to unlock land values to fund urban infrastructure.
Questions about off-budget transactions
The Punjab government has been advised to allocate all revenue to the State Consolidated Fund (CSF) to improve the quality of public finances. In recent years, the revenues of Public Infrastructure Development Board, Punjab Rural Development Board, Punjab Municipal Infrastructure Development Fund, Punbus, Punjab Pollution Control Board and Punjab State Transport Society among others have been excluded from the CFS. The panel questioned off-budget transactions against the fundamental principle of public finance, in addition to citing other reasons, including the dilution of transparency and accountability, poor results and skewed priorities, according to the people. cited above.
The commission, which looked into the finances of the panchayati raj institutions, found that their revenues and expenditures were insufficient to perform their statutory functions, as not only are their revenues negligible, but they also lack organizational capacity. and technical expertise. An increase in property tax in rural areas, the imposition of an entertainment tax and mobile services tax and a 20% share in total business tax proceeds are some of the measures recommended to strengthen their resources.