Interview | Solution to Punjab’s budget crisis lies at home, not in Delhi: Lakhanpal
Punjab’s finances are in dire straits. Deteriorating fiscal health has impacted the state’s ability to invest in infrastructure, education, health, nutrition and other key areas, in addition to leading to non-release of funds to local organizations. The 6th Punjab Finance Commission (PFC), mandated to review the decentralization of funds and the existing imbalance, also reviewed the financial health of the state. The Hindustan Times spoke to PFC Chairman and former Chief Secretary KR Lakhanpal, who submitted the commission’s report to the Governor of Punjab last week, on the financial health of the state, the framework of budgetary consolidation and the resources of urban organizations. Edited excerpts:
What is your opinion on the state of finances in Punjab?
State finances are in a sorry state. You have to make an intense effort. The solution to this lies in Chandigarh and Punjab, not Delhi. Asking for a package in Delhi is just to make a point. Everyone knows that won’t come. Each state would like to request a package because it is the easiest solution. This is the line of least resistance that, unfortunately, previous governments in Punjab have followed for the past 30 years. This government should not fall into this trap.
Three things the government needs to do to improve its finances?
Punjab needs to increase its tax to GDP ratio, which is very low compared to other states. Second, the state does not derive optimal revenue from the various economic and social services it provides. Third, you also need to look at your expenses. Unfortunately, we have improved our expenditure base so much that simply mobilizing additional resources and increasing revenues will not be enough. Our per capita cost of ownership to the government is the highest in the country. Punjab once prided itself on its highest growth rate and per capita income. Today we have the highest per capita salary expenditures, the highest per capita pension expenditures, the highest per capita debt and the highest per capita interest on debt. The meaning is completely reversed.
Where are the local authorities in all this?
They are not in a good position. They receive funds from central transfers, state transfers and own resources. The three handles must be pressed to improve the functioning of these organs and allow them to deliver. However, they are totally dependent on Center transfers. Central grants based on recommendations from Central Finance Committees (CFCs), which began with the 10th CFC, have steadily increased, while transfers of funds from state governments to local bodies have declined.
What do you propose to make local authorities autonomous?
The current practice of pushing for more central and state transfers to local bodies would not be sufficient. Local organizations should mobilize their own resources. With the implementation of the Goods and Services Tax (GST), most of the local resources such as grant and local development tax have been subsumed. The resources of local authorities come from two poles throughout the world: real estate and consumption. Unfortunately, neither of these two streams has been put into viable operation in Punjab. Tax collection is nonchalant. There are huge exemptions. In property tax, there are issues related to mapping, updating land records and compliance. In 2018, the state government released new display advertising and property tax policies for urban local bodies. This is a good first step, but we will know over time if these measures have been able to generate resources.
What about their share in taxes?
This is the consumption part – taxes on electricity, excise duties, petroleum products, etc. When we abolished the grant in 2006, a new law was put in place to compensate local bodies for lost revenue by giving 10 (now 11%) of the value added tax (vat) revenue . This has been implemented until there is a statutory safeguard. However, the TPS law does not provide for this and the resources of local authorities have become subject to the vagaries of State finances. Our view is that a new law should be passed to statutorily guarantee that this money (part of the GST, VAT and other taxes) goes to local bodies. The state government did it for power. You also have to do it for the GST.
Any other suggested areas for resource mobilization?
There are areas such as amusement tax and land and property transfer tax. We have provided a model of what other states like Maharashtra, Gujarat, Tamil Nadu, Kerala and Andhra Pradesh are doing. Their communal bodies are financially sound.
What is your suggested roadmap?
The transfer of resources or even the broader picture of improving the finances of state government and local agencies is only a subset of the overall improvement in governance. Governance needs to be reinvented. For example, land valuation is important because real estate prices have exploded. Punjab is the only state that captures any increase in value by levying land use change charges, development charges or tradable development rights etc. while other states have developed mega projects such as the Sabarmati waterfront or the Bandra-Kurla complex through value capture funding. Another important area is the management of properties owned by the state government and local bodies, not by disposing of them but by using them optimally. Then, town planning is totally fragmented without development of the periphery. We have stressed that you need to develop synergies between the development of urban and rural areas. We must enable cities and towns to generate enormous resources using innovative measures.
What has been the government’s response to reports of PFCs in the past?
Unfortunately, while state governments have been very quick to set up the commissions, the handling of their reports has sometimes not been consistent with the provisions of the Constitution. The Constitution requires the state government to address each of the recommendations, indicate whether it agrees or disagrees, and what action has been taken. The state did not follow the strict constitutional route when dealing with the reports of the Fourth and Fifth Committees. There was a symbolic conformity. In the ATR and explanatory memorandum to the fourth report of the finance commission, the state government merely summarized the recommendations and said nothing about the actions taken.