Punjab power subsidy at multi-year high, other sops in focus in new budget

Punjab's new budget promises sops that may delay the state's date with fiscal prudence

Punjab’s new budget promises sops as the state struggles to earn enough. It provides 300 free units of electricity, farmer subsidies, allocations to hire more than 26,454 new employees, and regularising contract workers.

An analysis of the budget shows the state has to walk a tightrope between impressing voters and fiscal prudence. Governments usually spend more than they earn. Punjab’s spending seems based on the hope of higher income later.

There are two main ways a government spends its money. One is capital expenditure on building roads, buildings, and other long-term infrastructure. The other is revenue expenditure where the spending is on salaries, interest payments, and subsidies. Punjab’s capital expenditure has typically been around a tenth of its rising revenue expenditure, as chart 1 shows.

A significant share of Punjab’s rising revenue expenditure is sops on electricity. This went from 11.7 per cent of government revenue receipts in 2016-17 to 16.6 per cent as per budget estimates for 2022-23. Revenue receipts refer to what the government earns from taxes and other income.

An amount of Rs 6,947 crore has been allocated towards providing free power to farmers. The budget estimates indicate Rs 1,239 crore allocated to agriculture and allied activities in total. Punjab allocated the equivalent of 9.5 per cent of its total expenditure to agriculture, according to a note by the Delhi-based PRS Legislative Research. This is higher than other states where average allocation is 6.2 per cent of expenditure.

Punjab’s additional agriculture allocation comes at the cost of other segments. Its allocations for health and education are lower than other states. It allocated 13.2 per cent of total expenditure to education in 2022-23 compared to the all-state average of 15.2 per cent, according to PRS data. It allocated to 4.7 per cent to health compared to states’ average of 6 per cent.

Pensions and salaries account for nearly half of government spending. The budget announced allocations for fresh recruitment of 26,454 employees and the regularisation of 36,000 contractual employees. The allocations are less than Rs 1,300 crore, but the trend may shape future employee outgo. Salary outgo is 28 per cent higher than in 2018-19. Pension outgo is 50 per cent higher.

Committed expenditure accounts for 70 per cent of the budget’s allocations, according to PRS. It is the money reserved for payments including salaries, pensions and interest. This does not leave much room for spending elsewhere.

Punjab’s government has said that it would raise its income to pay for the additional expenditure through avenues such as mining and excise revenue. The revenue deficit is worse than budget estimates even before the pandemic. The state’s tax and non-tax revenues grew in single-digit terms between 2018-19 and 2021-22. It projects an 18.7 per cent growth rate for 2022-23.

The fiscal deficit increased from Rs 16,059 crore in 2018-19 to a projected Rs 23,835 crore. The government borrows this amount to meet its expenses. The deficit is also calculated as a percentage of gross state domestic product (GSDP) to account for the state’s economic size at different times. The fiscal deficit has risen from 3.08 per cent of GSDP to 3.78 per cent of GSDP in the same period. This assumes the government is able to meet its projections.

Any shortfall would make meeting the projections a tough ask. As would any spike in electricity prices amid an international energy crunch.