ADB approves USD 100 mln loan to strengthen finances of India’s Punjab state
Although Punjab is one of the richest states in India, its economic growth had slowed and become more volatile, partly because of the poor health of state finances.
The Asian Development Bank (ADB) has approved a loan of $100 million as the third and last tranche of a $200 million policy-based program to strengthen the finances of India's Punjab state.
Although Punjab is one of the richest states in India, its economic growth had slowed and become more volatile, partly because of the poor health of state finances. Commitments to salaries, pensions, interest payments, and subsidies almost exhausted revenues and led to spiralling borrowings. Meanwhile, the state government's decades-long policy of providing free electricity to farmers and other subsidies to promote agriculture led to a vicious cycle of mounting revenue and fiscal deficits.
"Despite some uncontrollable delays, the ADB program has made significant strides toward structural change in Punjab, which has placed state finances on a much stronger footing," said Ms Cigdem Akin, Senior Public Management Economist at ADB. "Reining in the power subsidy burden on state finances will help generate more resources for capital spending while rationalizing expenditures such as salaries and pensions will help strengthen fiscal discipline."
The program, first approved in November 2014, specified a total of 22 policy actions to be taken by Punjab to create fiscal space in the state to sustain capital investment and improve services.
The first tranche of $50 million released in 2014 focused on eight policy actions to improve fiscal management and rationalize power sector spending. These included drafting of fiscal management rules, the operationalization of a new fiscal policy and management unit, and a roadmap for a medium-term expenditure framework by the Finance Department. Power sector actions included gathering data for tariff determination, feeder metering, a strategy paper for tariff targeting, and the planning of a public awareness campaign.
The second tranche of $50 million released in May 2018 required seven policy actions focused on the power sector and revenue mobilization. The policy actions brought in metering on distribution transformers connected to agriculture power feeders, implementation of the subsidy targeting plan, a public awareness campaign, and a system of energy demand forecasting. The revenue related policy actions were the submission of a tax bill to the state legislature and digitization of land records for all areas of the state.
The release of the third tranche required compliance with seven policy actions. These included adoption of the state fiscal responsibility and budget management rules in October 2018; approval of a medium-term framework for FY2017-2019 that sets realistic targets for a fiscal framework and capital outlay; implementation of a gender-responsive expenditure framework for the health, education, power, and public works departments; installation of a comprehensive electronic database on Punjab government employees and pensions to help keep better track of wages and benefits payable; and implementation of cash forecasting methodology for the treasury. The Punjab government has fully complied with these five third-tranche policy actions while the other two policy actions—changes in the tax deduction at source for works contracts and revisions to the turnover tax rate— were subsumed under the Goods and Services Tax, rolled out nationwide in India in July 2017.
"The state government has demonstrated strong ownership and a sense of appreciation for the benefits of the ADB program," said Mr Bruno Carrasco, Director of the Public Management, Financial Sector, and Trade Division of ADB's South Asia Department. "Even after program completion, we see little risk of reversal of the policy actions taken. We hope to continue to engage with the state government to sustain momentum toward turning the state finances around."
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 67 members—48 from the region. In 2017, ADB operations totalled $32.2 billion, including $11.9 billion in co-financing.