Punjab’s Fiscal Woes A Cause For Concern

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The freeze on banks’ lending to the Government of Punjab (GoP), has blown over with the Reserve Bank of India (RBI) issuing an authorisation of cash credit limit of INR175.23bn, towards the first installment for the procurement of wheat during the ongoing rabi season, however the liquidity crunch for GoP lately has become a perennial problem, says India Ratings and Research (Ind-Ra).

Punjab has recently been in the news, as 30 banks led by the State Bank of India decided to freeze lending to the GoP. At the core of this decision was the missing stock of food grains worth INR200bn from godowns in Punjab, which the state claims to have procured after taking loans from these banks. As a result, RBI had asked the banks to make provision for losses on food grain-related loans issued to the GoP.

The financial situation of the GoP, particularly with respect to liquidity has remained quite precarious over the past few years. GoP has been the highest user of RBI’s ways and means advances (WMA) to tide over temporary mismatches in the states cash flow. GoP has also been the highest utiliser of the RBI overdraft facility among both special and non-special category states in India. The liquidity situation has become worrisome since FY12. In FY17 (budget estimate), Punjab proposes to use INR195bn from WMA facility of RBI, up from INR170bn in FY16 (revised estimate) and INR192.68bn in FY15.

Punjab state borrowings

It appears that the liquidity problem has been so acute that the state from time to time has even used mortgaged assets namely Gandhi Vanita Ashram for widows in Jalandhar and the state jails at Bathinda, Amritsar and Goindwal to raise cash from banks. The liquidity squeeze has been compounded by rising debt, where the total outstanding liabilities have more than doubled since FY09, and is the second highest (among non-special states) as a percent of gross state domestic product at 31.4% (FY16BE). The government also proposes to take over INR156.32bn debt from the Punjab State Power Corporation Limited under Ujwal Discom Assurance Yojana.

The financial situation in the state of Punjab has deteriorated considerably, believes Ind-Ra. In the last two years the gross fiscal deficit in the state of Punjab rose by 23.0% to INR130.87bn in FY17 (budget estimate) and public debt rose sharply by 32.3%. Although the quality of deficit (deficit incurred to finance current consumption as percentage of total deficit) improved to 61% in FY17 (BE) from 70% in FY15. It deteriorated in FY16, to the revised estimate (61.8%) from the budget estimate (53.8%).

The state of Punjab’s inability to generate positive primary balance continues to be a key worry. The level of debt/revenue also remains elevated at 2.75x in FY17 (BE).