Punjab’s Fiscal Crisis: A Comprehensive Analysis of the State’s Financial Distress.....by KBS Sidhu

Punjab, once celebrated for its robust agrarian economy, is now grappling with an acute fiscal imbalance. Although its tax-to-gross state domestic product (GSDP) ratio is budgeted at roughly 7.1 % of GSDP for 2025-26, this headline figure excludes statutory fees, cesses, surcharges, and municipal taxes that never enter the Consolidated Fund—components that, if included, could push the effective burden well past 10 %.

Yet even this elevated take has failed to keep pace with runaway expenditure. Remedying Punjab’s woes will therefore require a sharper focus on rationalising and reprioritising spending, rather than squeezing ever-higher receipts from a populace already burdened by a sluggish farm sector and lower-than-expected private-sector investment.

1. Cash-Flow Squeeze and Emergency Measures

Since early June 2025, the Finance Department has cautioned that routine liabilities—especially salaries—may not be met on time. On 5 June the State Government ordered 12 key departments to surrender all unspent balances to the treasury, underscoring how close the state is to exhausting its working cash.

Delays of this kind are not new: in late 2024 Class I–III employees went without August salaries after the Department flagged an identical shortage.With a monthly pay bill of roughly ₹ 2,916 crore and annual pension outgo of nearly ₹ 19,800 crore, even brief revenue shortfalls quickly snowball into a crisis.

2. A History of Overdrafts and Banking Friction

Punjab has slipped into Reserve Bank of India (RBI) overdraft repeatedly since 2012-13, most notoriously in March 2017 when payments were frozen after 14 consecutive overdraft days.

In the current episode fresh tensions surfaced when the state de-empanelled HDFC Bank for failing to clear time-sensitive transactions. Such breakdowns in the government–banking interface erode market confidence and raise the spectre of halted cheque clearances if cash buffers dry up.

3. Shrinking Borrowing Headroom

The Central Government’s Fiscal Responsibility and Budget Management (FRBM) triggers have bitten hard. Open-market borrowing sought for 2025-26 was cut by ₹ 16,676 crore—38 per cent—because Punjab has yet to liquidate legacy power-sector dues that now top ₹ 15,000 crore.

Outstanding public debt is projected to jump to ₹ 4.17 lakh crore by March 2026, second only to Kerala on the debt-to-GSDP metric. Critically, nearly 90 per cent of fresh loans are earmarked for servicing old debt rather than funding development.

Under Article 293 (3) of the Constitution of India, the Central Government fixes every state’s annual Net Borrowing Ceiling (NBC)—currently pegged at roughly 3 % of the GSDP projected for the ensuing fiscal year, with an extra 0.5 % window available for states that meet power-sector-reform milestones.

This ceiling is comprehensive: it subsumes RBI-auctioned State Development Loans (which form the bulk of market debt) as well as negotiated loans from NABARD, multilateral lenders such as the World Bank and ADB, and even internal liabilities like employee General Provident Fund balances.

Because the same transparent formula is applied uniformly across the country and disclosed ex-ante, Punjab cannot plausibly fault the Centre for “pruning” its headroom; the recent cut simply reflects the state’s own liabilities brushing up against a nationwide, well-publicised threshold [18] [19].

4. The Latent Risk of Cheque Bounces

Although no major government cheque has bounced in 2025, the precedent from 2017—when all treasury payments were halted—remains relevant. Every time Ways-and-Means Advances are exhausted and overdraft limits breached, the RBI can legally stop honouring state cheques, paralysing vendors and employees alike.Punjab’s current scramble for idle departmental balances signals it is perilously close to that threshold.

5. Revenue Uptick Versus Expenditure Pressures

There are bright spots: Punjab clocked a record 25.3 per cent year-on-year rise in May 2025 GST collections, touching ₹ 2,006 crore—its best May performance ever. Yet this good news is dwarfed by fresh spending commitments, including salary hikes for rural dispensary and PRTC staff and phased release of ₹ 14,000 crore in long-pending arrears . In other words, revenue gains are being offset almost immediately by politically popular but fiscally costly decisions.

6. Managing the Expenditure Side: A Prerequisite for Stability

Given Punjab’s relatively healthy tax effort, the real lever lies in curbing expenditure growth. Priority reforms include:

• Targeted subsidy pruning—especially power-subsidy arrears that crowd out capital spending.
• Strict adherence to pay-revision roadmaps to prevent ad-hoc salary and pension awards.
• Outcome-based budgeting that links departmental allocations to measurable service delivery.
• Debt-management discipline—lengthening maturities and refinancing at lower rates rather than rolling over high-cost short-term debt.

Without decisive moves on these fronts, Punjab risks a downward spiral of higher borrowing, mounting interest, and stagnant development outlays—despite an already high tax-to-GSDP ratio.

7. Central Schemes Stalled by Unmet State Obligations

Many Centrally Sponsored Schemes (CSS) offer exceptionally generous Union support— 90:10 for special-category states, 75:25 or 60:40 for most core schemes, and even 50:50 in certain optional or performance-linked programmes (static.pib.gov.in).

Yet Punjab is now unable to draw fresh instalments because (i) it has not deposited its own matching share and (ii) utilisation certificates (UCs) for earlier releases remain outstanding.

The Comptroller and Auditor General recently highlighted ₹ 3,674 crore for which five key departments have failed to submit UCs, prompting the Centre to hold back further tranches (ptcnews.tv).

Until the state reins in discretionary spending and cleans up its financial reporting, these high-leverage funds will stay frozen—depriving Punjab of the very development grants that could help ease its liquidity crunch.

8. Slim Prospects from the Finance Commission—and the End of the GST Safety-Net

The Fifteenth Finance Commission has frozen the vertical devolution of Union taxes to the states at 41 % of the divisible pool—down from the 42 % recommended by its predecessor (prsindia.org). Within that pool Punjab’s horizontal share is barely 1.79 %, translating to about ₹14,000 crore a year under current buoyancy assumptions (prsindia.org).

As the current five-year award cycle (2021-26) closes in March 2026—and with the GST-compensation safety-net already withdrawn since June 2022—any shortfall in Punjab’s own-tax (State GST) collections will now fall entirely on the state’s shoulders, with no central back-stop.

Against this backdrop, the State Finance Department’s memorandum to the forthcoming Sixteenth Finance Commission must be pursued with deft bureaucratic follow-up and tactful political lobbying if Punjab hopes to secure a larger cut or special-purpose grants.

Absent such engagement—and without a demonstrably tight leash on discretionary spending—Punjab should not expect windfall gains from the new Central Finance Commission; the formula is data-driven, and business-as-usual will yield business-as-usual outcomes.

9. The Bumpy Road Ahead: Tough Choices Before 2027

Punjab’s fiscal distress has plainly reached a tipping point, but the way out is neither mysterious nor impossible.

A reassuring uptick in the real-estate market promises firmer stamp-duty receipts; yet ambitious land-pooling projects—designed to acquire vast semi-urban tracts—will not translate into near-term revenue because pooled land is largely exempt from duty until it is re-parcelled and sold.

That leaves one elephant squarely in the room: the open-ended agricultural power subsidy, a benefit now captured disproportionately by well-capitalised landowners who run multiple deep-bore, high-horsepower tubewells, while smaller farmers queue fruitlessly for new connections or burn costly diesel. Simultaneously, canal irrigation at tail ends is starved of both water and maintenance funding.

None of these problems require rocket-science economics—only political resolve to realign subsidies, invest in distribution infrastructure, and enforce targeted, time-bound benefits.

Whether such “bold” moves materialise is another matter: the Vidhan Sabha election looms in February 2027, and the ruling AAP, already ousted in Delhi, may hesitate to court short-term pain.

Without decisive, front-loaded reform, however, Punjab risks remaining shackled to emergency fund recalls, borrowing curbs, and an ever-escalating debt load—trapped in a liquidity vise that rhetoric alone cannot break.

June 13, 2025