The NITI Aayog’s Fiscal Health Index (FHI) for the financial year 2022-23 has delivered a stark revelation — Punjab has ranked the lowest among 18 major Indian states. With an FHI score of just 10.7, far behind Odisha’s leading score of 67.8, Punjab’s fiscal health is in critical condition. The state’s position reflected systemic weaknesses across multiple fiscal parameters, including debt management, expenditure quality, and revenue mobilization.

The FHI evaluated states on five broad indicators — quality of expenditure, revenue mobilization, fiscal prudence, debt index, and debt sustainability. Punjab’s failure is rooted in its dismal performance in quality of expenditure, fiscal prudence, and debt index; while it showed marginal improvement in revenue mobilization and debt sustainability.

Reasons

As per the report, Punjab’s expenditure priorities have been skewed, with significant implications for public services and long-term growth. The report noted decline in social sector spending, suboptimal capital expenditure, and low returns on investments as the reasons affecting its quality of expenditure. The proportion of spending on education fell from 12.9 percent of total expenditure in 2018-19 to 12 percent in 2022-23. Similarly, health expenditure declined from 4.1 to 3.9 percent during the same period, falling below national averages.

The report observed that while the capital expenditure as a percentage of total expenditure increased from three percent in 2018-19 to 5.5 percent in 2022-23, it remains significantly below the average of other major states. Moreover, seven percent of the state’s borrowings went into capital projects, yet many remain incomplete, exacerbating inefficiencies. It was also noted that Punjab’s investments in public sector undertakings (PSUs) yielded a meager return of 0.02 percent, far below the interest costs of state borrowings — a mismatch that added strain to the state’s already fragile fiscal framework.

The report further pointed out that despite some progress, Punjab’s revenue mobilization efforts have been insufficient to counterbalance its growing fiscal burden. In terms of growth in tax revenues, it added that the own tax revenues grew by 13.1 percent in 2022-23, primarily driven by robust sales tax and VAT collections, and the excise duties also witnessed notable growth. It also noted a surge in the non-tax revenue by 30.2 percent, with significant contributions from sectors like miscellaneous general services and education. However, road transport receipts declined due to an aging vehicle fleet and free travel policies, signaling inefficiencies.

Punjab’s fiscal management has been plagued by persistent deficits — in terms of rising revenue deficit and escalating fiscal deficit. As per the report, the revenue deficit-to-GSDP ratio grew from 2.5 percent in 2018-19 to 3.8 percent in 2022-23. The state failed to meet revenue deficit targets consistently over the past five years. Besides, the fiscal deficit-to-GSDP ratio surged from 3.1 percent in 2018-19 to five percent in 2022-23 — primarily financed through market borrowings, underscoring an unsustainable reliance on debt.

Debt Index

Punjab’s debt levels have reached alarming proportions, raising serious concerns about its fiscal future — calculated on the basis of increasing debt-to-GSDP ratio, and negative debt sustainability. The report pointed out that the debt-to-GSDP ratio climbed from ~41percent in 2018-19 to ~46 percent in 2022-23. The growth rate of outstanding public debt rose sharply from 4.5 percent in 2021-22 to 13.8 percent in 2022-23. Also, Punjab’s debt sustainability remained negative, suggesting an inability to stabilize or reduce debt without significant policy intervention. A Debt Management Unit has been established, aiming to reduce the debt-to-GSDP ratio by three percentage points by 2025-26.

Committed Expenditure

A significant portion of Punjab’s revenue expenditure is locked into committed expenditures, leaving little room for developmental initiatives. Approximately 60-65 percent of the state’s total revenue expenditure has been dedicated to salaries, pensions, and interest payments since 2018-19 â€” leaving limited resources for development-oriented spending.

Structural Issues

Punjab’s financial crisis is rooted in structural inefficiencies and poor fiscal discipline. The backlog of incomplete projects reflected inefficiencies in capital project execution, while high borrowing costs further strained the fiscal system without yielding commensurate returns. At the same time, the state’s reliance on market borrowings to finance deficits highlighted a lack of sustainable revenue generation mechanisms.

Recommendations

To address these challenges, the report recommended enhancing revenue mobilization, improving capital utilization, managing debt, and rebalance expenditure. The report stated that Punjab must “explore untapped revenue streams” and “optimize existing tax collection mechanisms”. It also suggested ensuring â€œtimely completion of capital projects” which will improve returns on investments and reduce wastage. Efforts to diversify debt issuance and reduce reliance on high-cost borrowings are also suggested. Besides, the report also stressed on allocating more resources to education, health, and infrastructure that will boost social and economic development.