Punjab needs a fiscal reset to avert debt spiral: Study to 16th FC

An ISB evaluation submitted to the 16th Finance Commission flags rising debt, subsidy pressures and weak revenues in Punjab, warning that the debt-to-GSDP ratio could cross 60 per cent by 2030-31

Punjab needs a calibrated mix of fiscal consolidation, revenue reforms, public investment and technological innovation to trigger a self-reinforcing cycle of growth and fiscal resilience, said an evaluation of the state’s finances, submitted to the 16th Finance Commission (FC). 

 

According to the study undertaken by the Indian School of Business (ISB), Punjab’s outstanding debt jumped from ₹92,282 crore in 2012-13 to ₹3.14 trillion in 2022-23. This pushed the debt-to-gross state domestic product (GSDP) ratio from 23 per cent to 38 per cent. 

 

The study flags that Punjab already has one of the heaviest liability burdens among non-special category states. It projects that if the trend continues, the debt-GSDP ratio could cross 60 per cent by 2030-31. Debt servicing would then swallow much of the budget.

 

 

Given the existing stock of liabilities, the report urges more strategic borrowing. “Moving forward, Punjab must pursue a shift towards low-cost borrowing, strategic debt restructuring, and rationalising subsidies through direct benefit transfers (DBTs) to relieve fiscal pressure,” the study recommended.

 

A central criticism is chronic slippage against the state’s own Fiscal Responsibility and Budget Management (FRBM) targets.

 

In 2022-23, the revenue deficit turned out more than double of what the medium-term fiscal plan had projected, and the fiscal deficit overshot by over 42 per cent.

 

To tackle this problem, the institution recommends treating FRBM and the medium-term fiscal policy as an operational guide rather than a purely declaratory statement.

 

Punjab’s revenue receipts have increased over time, but the state's tax-GSDP ratio remains below its potential, ranging between 7.5 and 9 per cent over the last decade.

 

Non-tax revenues have still not recovered to pre-Covid levels. 

 

“Punjab’s fiscal landscape, marked by a low and stagnant tax-to-GSDP ratio, underperforming non-tax revenue streams, and rising debt obligations, underscores the urgent need for a comprehensive and evidence-based reform strategy,” argues the study. 

 

It recommends raising the ratio further by expanding the revenue base, strengthening tax compliance and using advanced electronic filing and payment systems.

 

The study suggests that the state should explore new revenue streams such as public–private partnerships and monetisation of state assets, and provide support to industries and exports that can act as catalysts for revenue generation.

 

On expenditure, the report highlights the pressure from committed spending and subsidies. “Due to the focus on subsidies and recurrent expenditures, Punjab lags in capital-intensive sectors like industrial infrastructure, logistics, and digital transformation, restricting long-term economic growth,” highlights the study.

 

Total committed expenditure (salaries, pensions, interest and earlier subsidies) rose from Rs. 32,049 crore in 2012-13 to Rs. 70,290 crore in 2022-23. In 2021-22, power subsidy was 14.23 per cent of revenue expenditure and 72.79% of the revenue deficit.

 

It recommends rationalising subsidies through better targeting and evaluation, including use of direct benefit transfers, and undertaking a cost–benefit analysis to assess their impact on vulnerable sections and on fiscal sustainability.

 

Ultimately, the study argues that fiscal surgery must be paired with growth to deal with the state’s long-festering debt problem, rising subsidies and chronic revenue shortfalls. It urges a “big push” in diversification beyond the wheat–paddy regime, investment in logistics and border trade infrastructure, industrial clusters and skills, and even time-bound tax incentives for industry. 

 

“At the heart of a successful fiscal transformation lies economic revitalization. Punjab must unlock new engines of growth by diversifying its agriculture—through high-value crops, export-oriented production, and agri-logistics—and by modernizing its industrial base via SEZs, industrial corridors, and ease-of-doing-business reforms,” it suggested. 

 

Punjab, it argues, can emerge from its current debt trap and chart a path toward a financially empowered and prosperous future with the right mix of prudence, innovation, and investment. “Ultimately, the vision must be to make Punjab self-reliant,” it concludes.