Punjab’s Debt Crisis: A Historical and Contemporary Analysis

Once known as the “Granary of India”, Punjab today finds itself in a troubling financial situation. Over the decades, the state’s fiscal health has deteriorated due to a combination of populist policies, weak revenue mobilization, and unchecked borrowings by successive governments — be it the Akali Dal-BJP alliance, Congress, or the current Aam Aadmi Party (AAP) government.

As of 2024–25, Punjab’s outstanding public debt has crossed ₹3.5 lakh crore, amounting to nearly 48% of its Gross State Domestic Product (GSDP). This level of debt places Punjab among the most fiscally stressed states in India. But to understand how Punjab arrived at this point, one must examine the trajectory across governments.

Origins of the Debt Problem: Post-Green Revolution Era

Punjab’s modern debt crisis doesn’t have a single origin point. However, many economists point to the post-Green Revolution era of the 1980s and 1990s as the beginning of the state’s fiscal troubles.

During this time, Punjab was recovering from years of insurgency and political instability. The state’s economy had stagnated, industrial growth had slowed, and agriculture — though still dominant — was no longer as profitable as in the 1960s and 1970s.

Despite this economic stagnation, successive governments began offering free or subsidized electricity, water, and agricultural inputs to farmers in a bid to maintain rural support. These welfare schemes, although necessary in the short term, were implemented without sufficient financial planning, eventually ballooning into a permanent liability.

The Akali Dal–BJP Years (1997–2002, 2007–2017): Populism and Expanding Liabilities

The Shiromani Akali Dal (SAD), often in alliance with the Bharatiya Janata Party (BJP), governed Punjab for significant stretches, especially from 1997 to 2002 and again from 2007 to 2017.

During this period:

  • Free power to farmers was institutionalized in 1997 by the SAD-BJP government under Parkash Singh Badal, making Punjab the first state in India to offer such a policy. While it gained massive political mileage, it also placed an annual burden of thousands of crores on the state exchequer.
  • Infrastructure projects like thermal power plants and expressways were started, but often through debt financing rather than revenue surpluses or public-private partnerships.
  • Salaries and pensions of government employees continued to rise without any reform in recruitment or retirement policies.

Debt figures during the end of the Akali rule in 2017 stood at ₹1.82 lakh crore, a steep increase from under ₹50,000 crore in 2002. While some of this debt was due to capital expenditure, a large portion went into recurring expenses and interest payments.

Congress Government (2017–2022): Loan Waivers and No Structural Reforms

When Captain Amarinder Singh-led Congress came to power in 2017, it inherited a heavy debt load. Instead of reversing the trend, the Congress government further increased borrowing.

Key factors during this period:

  • Farm loan waiver of around ₹10,000 crore was announced, of which only about ₹4,000 crore was disbursed during the term. The waiver, while politically popular, added to the state’s fiscal stress.
  • No major effort was made to rationalize subsidies or cut non-productive expenses.
  • Punjab’s debt by the end of Congress rule in early 2022 touched around ₹2.83 lakh crore, rising by over ₹1 lakh crore in just five years.

Despite repeated recommendations from the 14th and 15th Finance Commissions for fiscal prudence, Congress continued with high revenue expenditure and missed the opportunity to reform power distribution, taxation, or pension liabilities.

AAP Government (2022–Present): Ambitious Promises, Rising Fiscal Strain

When the Aam Aadmi Party (AAP) won a massive mandate in the 2022 elections, expectations were high. The Bhagwant Mann-led government promised to clean up corruption, improve healthcare and education, and deliver welfare — all while improving fiscal discipline.

However, reality has been more complex:

What AAP Promised

  • ₹1,000 monthly allowance to all women above 18.
  • 300 units of free electricity per household per month.
  • Improved government schools and mohalla clinics.
  • Massive job creation and industrialization.

What Actually Happened

  • The free electricity scheme was implemented, costing the exchequer over ₹6,000 crore annually.
  • The ₹1,000/month scheme hasn’t yet been implemented due to lack of funds, but pressure to deliver it remains.
  • Tax collection has marginally improved, but not enough to offset growing liabilities.
  • The state’s revenue deficit has widened, and debt has risen from ₹2.83 lakh crore in 2022 to over ₹3.5 lakh crore in 2024, within just two years.

While AAP’s intentions to improve governance and plug corruption are commendable, their simultaneous roll-out of costly welfare schemes — without corresponding revenue enhancement or expenditure control — has deepened the debt problem.

Power Sector: The Core of the Fiscal Mess

One of the biggest contributors to Punjab’s debt is its ailing power sector. The Punjab State Power Corporation Limited (PSPCL) has faced chronic losses due to:

  • Free/subsidized electricity to farmers and residential consumers.
  • Poor billing efficiency and low recovery rates.
  • Outdated infrastructure and high transmission losses.

The state government often delays payment of power subsidies, leading PSPCL to borrow from banks, which the state later has to repay — adding to its official debt burden.

Debt Composition and Consequences

Key Debt Metrics (2024–25 Estimates)

  • Total debt: ₹3.5 lakh crore
  • Interest payments: ₹25,000–₹30,000 crore annually
  • Debt-to-GSDP ratio: ~48% (well above the FRBM guideline of 30–35%)
  • Revenue deficit: Persistently negative
  • Capital expenditure: Less than 15% of total spending

Implications

  1. Reduced Development Spending: Most of Punjab’s revenue goes toward salaries, pensions, subsidies, and interest — leaving little for roads, hospitals, or education infrastructure.
  2. Credit Downgrade Risks: Rating agencies have issued warnings, making future borrowings more expensive.
  3. Private Investment Avoidance: Businesses are wary of investing in a state with weak fiscal fundamentals and overdependence on agriculture.
  4. Youth Migration: With few jobs and declining public services, lakhs of Punjabi youth are emigrating to Canada, Australia, and Europe.

What Needs to Be Done: A Roadmap for Fiscal Recovery

Fixing Punjab’s debt problem is not impossible, but it requires political courage and bipartisan consensus. Some critical reforms include:

1. Rationalizing Subsidies

Instead of blanket freebies, subsidies must be targeted through Direct Benefit Transfers (DBT) to those truly in need.

2. Power Sector Reforms

  • Improve billing efficiency and reduce losses.
  • Encourage solar and decentralized energy sources.
  • Prompt subsidy payments from the state to PSPCL.

3. Expanding Tax Base

  • Use digital tools and GST data to improve compliance.
  • Strengthen municipal taxation and property records.

4. Reducing Salary and Pension Burden

  • Shift to New Pension Scheme (NPS) for new recruits.
  • Freeze non-essential hiring in government departments.

5. Boosting Industrial and Service Sectors

  • Leverage Punjab’s diaspora for FDI and entrepreneurship.
  • Promote agro-processing, food exports, IT, and logistics.

6. Transparent Borrowing

The government must ensure that borrowed funds are used for productive capital expenditure and not revenue deficits.

Conclusion: A Collective Responsibility

Punjab’s debt crisis is not the result of any single party or individual. Over the past two decades, Akali Dal, Congress, and AAP have all contributed to the problem — some through neglect, others through overambitious welfare promises. The situation is now such that fiscal correction is no longer optional but urgent.

For Punjab to reclaim its legacy of prosperity and leadership, it must make tough choices. Citizens, too, must be willing to accept short-term pain — such as reduced subsidies — for long-term stability. Only through a collective resolve can Punjab shift from being a debt-trapped state to a model of sustainable development.

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