The FINANCIAL — The Asian Development Bank 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 spiraling 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.
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, operationalization of a new fiscal policy and management unit, and a road map 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.
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.