Punjab Between Debt Deficits and the Illusion of Stability
Punjab Chief Minister Bhagwant Mann surveyed floods! (Image Bhagwant Mann, X)
Punjab’s debt spiral is more than regional distress; it challenges India’s fiscal federalism and raises questions about the sustainability of national economic discipline.
By P SESH KUMAR
NEW DELHI, September 27, 2025 — Punjab is one of India’s most indebted states, with liabilities exceeding 40 percent of its Gross State Domestic Product (GSDP). The CAG’s State Finances 2025 volume captures the gravity of the problem as of 2022–23: a revenue deficit of nearly 2 percent of GSDP, fiscal deficits brushing 3.8 percent, and debt well above safe thresholds.
But that snapshot is already outdated. In 2023–24, Punjab’s revenue deficit widened further to over ₹28,000 crore, with fiscal deficits breaching 4.4 percent of GSDP. The 2024–25 budget projects more of the same: a still-high debt stock (≈44 percent of GSDP), continued deficits, and shortfalls in GST and non-tax revenues.
What emerges is not a one-time slippage but a structural trap, compounded by subsidies, off-budget borrowings, and political compulsions. Punjab exemplifies the limits of the CAG’s lagged reporting cycle: the crisis it flags in 2022–23 is already deeper by 2024–25.
Punjab at the End of FY 2022–23: CAG’s Snapshot
By the end of March 2023, Punjab was fiscally cornered. The CAG noted that the state’s debt-GSDP ratio stood at 40.35 percent, the highest among Indian states and nearly 7 percentage points above the Finance Commission’s indicative ceiling of 33.3 percent. Including other liabilities, the number was worse: total liabilities amounted to 45.86 percent of GSDP.
The state also disclosed off-budget borrowings of ₹3,243 crore, while its power sector subsidies-mainly to Punjab State Power Corporation Limited (PSPCL)-amounted to an implicit burden of ₹20,200 crore. These liabilities, while not fully captured in fiscal deficit numbers, represented a continuing drag.
The revenue deficit stood at ₹12,554 crore, or 1.99 percent of GSDP, even after receiving ₹8,274 crore in Finance Commission revenue-deficit grants. Fiscal deficit was estimated at ₹23,812 crore, or 3.78 percent of GSDP. Both were within limits only because of relaxed borrowing leeway permitted during the pandemic’s aftermath. In practice, Punjab was borrowing not just to invest but also to pay for salaries, pensions, and subsidies.
What the CAG exposed was Punjab’s chronic problem: a mismatch between limited revenues and high recurring expenditures, compounded by a debt overhang that eats into whatever fiscal space exists.
2023–24: Reality Check
If Punjab’s 2022–23 numbers were bad, the next year was worse. According to the state’s Accounts at a Glance 2023–24, Punjab recorded a revenue deficit of ₹28,215 crore and a fiscal deficit of ₹33,115 crore — equal to 3.79 percent and 4.45 percent of GSDP, respectively.
This meant two things. First, the revenue deficit more than doubled within a year, highlighting that Punjab’s spending on salaries, pensions, and subsidies far outpaced its revenue receipts. Second, the fiscal deficit breached the 4 percent mark, beyond what Finance Commission norms permit. The state was borrowing aggressively, not to finance capital expenditure but to fund its day-to-day bills.
Servicing this borrowing was itself becoming crippling. By 2023–24, Punjab’s debt service obligations were estimated at ₹34,470 crore, with interest payments alone consuming nearly a quarter of its revenue receipts. This is a classic debt trap: borrowing to service past borrowings while pushing development spending to the margins.
2024–25: Budget Promises and Revenue Shortfalls
Punjab’s 2024–25 Budget projected some correction: a revenue deficit of 2.9 percent of GSDP and a fiscal deficit of 3.6 percent (Budget Estimates). The government targeted net borrowings of about ₹31,700 crore and projected tax revenues of nearly ₹89,000 crore. But mid-year reviews in 2025 told a sobering story:
GST collections were 5–10 percent below target.
Non-tax revenue achieved only about 56 percent of budget estimates.
Borrowing was higher than budgeted to plug gaps.
As a result, the fiscal deficit trajectory risked slipping back towards 4 percent. Debt stock was projected to rise further, with outstanding liabilities at ~44 percent of GSDP, keeping Punjab firmly at the top of India’s indebtedness table.
Structural Traps: Why Punjab Can’t Break Free
Punjab’s predicament is not just about numbers but about deep-rooted structural traps:
Debt Overhang
When nearly half of GSDP is mirrored by debt, and a quarter of revenues go to interest, Punjab starts every fiscal year in the red. Punjab’s interest-to-revenue ratio is among the highest in the country, squeezing discretionary spending.
Subsidies as Political Gospel
Punjab’s politics runs on subsidies — particularly power. Free power to farmers, flat rates to households, and unrecovered costs by PSPCL have hardened into political gospel. In 2022–23, implicit power subsidies touched ₹20,200 crore, and they remain at similar magnitudes today. Rolling them back is electorally hazardous, so governments kick the can down the road.
Off-Budget Burdens
Even when budgets claim fiscal consolidation, off-budget liabilities tell a different story. Punjab disclosed ₹3,243 crore of such borrowings in 2022–23. Add guarantees and contingent liabilities of state-owned enterprises, and the effective debt burden is higher than headline figures suggest.
Weak Revenue Base
Despite being agriculturally rich, Punjab’s tax base is narrow. Agriculture is largely outside the tax net, industry has stagnated, and GST collections consistently fall short of buoyant states like Karnataka or Tamil Nadu. Property tax reforms in urban bodies remain politically sensitive and under-utilised.
Political Populism
Election cycles in Punjab are subsidy races. Loan waivers, enhanced pensions, and cash transfers are announced with little fiscal underpinning. Like in Telangana, once promised, these schemes are politically irreversible.
Revdi reward: Floundering Punjab, Andhra Pradesh fiscal health
The Human Development Paradox
Punjab’s fiscal crisis is especially striking because it coincides with middling human development outcomes. Unlike Kerala, which at least converts high deficits into strong health and education outcomes, Punjab’s social indicators are not proportionately superior. Literacy and infant mortality have improved but lag behind the best-performing states. In health spending per capita, Punjab trails Kerala and Tamil Nadu. In higher education and employability, it struggles to retain youth.
This makes its subsidies doubly inefficient: they strain finances without producing transformative outcomes.
Punjab and the CAG: Lessons on Audit Utility
Punjab’s story drives home the critique of the CAG’s State Finances 2025 volume. The audit snapshot for 2022–23 was accurate — Punjab was deficit-ridden and debt-heavy. But by the time the report was released in 2025, those deficits had doubled, and liabilities had mounted further. A two-year-old picture of distress risks underplaying the immediacy of the crisis. Legislators, media, and citizens relying on the CAG publication in 2025 to debate Punjab’s finances would be fighting yesterday’s battles while today’s arrears piled up.
This gap shows why timeliness matters. In states like Punjab, where fiscal space is eroding rapidly, a two-year delay renders an accountability tool more academic than actionable.
Can Punjab Be Saved?
Punjab’s recovery will not come from incremental tinkering; it demands structural reform and political courage.
- Debt Restructuring. Expensive short-tenure borrowings must be refinanced with longer-tenure, lower-coupon debt, ideally with central mediation. Without relief on debt servicing, no other reform will hold.
- Subsidy Rationalisation. Free power must be capped or targeted. Universal freebies must give way to means-tested transfers. Agriculture subsidies should be linked to productivity, not entitlement.
- Revenue Mobilisation. Punjab must widen its tax net. Urban property tax reforms, realistic user charges, and industrial revival policies are essential. GST enforcement must improve, and non-tax revenues must be set on realistic bases rather than inflated estimates.
- Expenditure Prioritisation. Borrowing must fund capital investment, not recurring salaries or subsidies. Public investment in health, education, and infrastructure must take precedence over politically expedient giveaways.
- Institutional Guardrails. All new guarantees and off-budget borrowings must be brought to the Assembly for approval. A Debt Sustainability Committee should publish quarterly stress tests. Transparency is not optional; it is the first step to credibility.
Punjab today stands as the most fiscally strained large state in India. Its debt ratios are the highest, its deficits recurring, and its subsidies entrenched. The CAG’s 2025 publication rightly flags these problems for 2022–23, but the two-year lag means that by the time the warning is issued, the crisis has already deepened.
Unless Punjab takes bold steps — rationalising subsidies, restructuring debt, widening its revenue base, and enforcing institutional transparency — it risks sinking deeper into a debt trap where each year’s borrowing only pays for the sins of the last. Punjab’s plight is not just a state story; it is a test of India’s fiscal federalism. If the Union and states cannot collaborate to rescue Punjab from its spiral, the credibility of India’s broader fiscal discipline framework will itself be questioned.
(This is an opinion piece, and views expressed are those of the author only)
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