In the long run, imprudent populist actions like doling out freebies beyond the state’s capabilities may lead certain Indian states towards the same fate as that of Sri Lanka, which is currently experiencing its worst economic crisis. The economic collapse has resulted in extraordinary inflation, wiping out public funds and causing shortages of basic commodities, along with other impacts such as civil unrest, political upheaval etc. In India, states like Punjab and West Bengal are facing a similar severe threat of going bankrupt as Sri Lanka.
During a four-hour meeting with Prime Minister Narendra Modi back in April 2022, some bureaucrats raised concern that populist policies in states like Punjab, Andhra Pradesh, and West Bengal could devastate their economies, as it did in Sri Lanka.
AAP’s replication of the ‘freebie’ based Delhi Model in Punjab and drying state exchequer
Some of the financial metrics of Punjab, a heavily indebted state, in recent times are starting to mirror those of Sri Lanka.
Punjab is one of India’s most indebted states, with debt exceeding 47 percent of its Gross State Domestic Product (GSDP), which declined by 1.85 percent in the previous fiscal year. This is far higher than the 38.7 percent threshold set by the Fiscal Responsibility and Budget Management Act (FRBMA).
With liabilities close to 3 lakh crore, its yearly interest load is more than Rs 20,000 crore. The AAP’s promised 300 units of free electricity will cost the state exchequer an additional Rs 5,000 crore in subsidies, adding to the state’s already unsustainable burden. AAP is most likely attempting to recreate its Delhi model in Punjab, oblivious to the vast contrasts in obligations and revenue generation between a traditionally rich state Delhi and a fast approaching bankruptcy Punjab.
The Aam Aadmi Party is neglecting the fact that Punjab is already burdened with multiple subsidies such as Subsidies in fertilizers, and price support for agricultural crops, as well as free power to farmers and every BPL, SC, and ST family till 200 units of electricity.
Punjab’s electricity subsidy and escalating cost to the state exchequer exceeds 16% of total receipts. Power distribution companies in India are already suffering greatly. Their troubles are mostly the result of two factors, the first is their failure to decrease transmission and distribution (T&D) losses, and the second is pricing hikes to keep up with escalating costs. Both have the potential to affect consumers across the country.
Despite the condition of the economy, the AAP government is granting subsidies and tariff cuts. The entire power subsidy in the current fiscal year is Rs 24,886 crore, which includes Rs 15,845 crore as a freebie for 300 units of power every month beginning in July of this year. Meanwhile, in two months, the government borrowed Rs 8,000 crore simply to pay interest on old loans.
Recent media reports reveal that the Punjab government even failed to provide salaries for the month of August to the state government officials in time thanks to the funds crunch. Meanwhile, Bhagwant Mann has announced regularisation of 36,000 more employees in government jobs. With the government already struggling to pay salaries of their current employees, how will they pay the benefits to these new regularised employees remains to be seen.
In between all this, Punjab government is spending money giving front-page advertisements in newspapers across the country. With state’s finances in doldrums, a string of such impractical decisions may totally derail Punjab’s economy and send it towards the same fate as Sri Lanka.
