Punjab's declining GDP reflect the broader issue of uneven development. Addressing these disparities is essential for promoting holistic growth and preventing social distress across states

The current state of India’s fiscal federalism is significantly detrimental to the states. The system needs to be reoriented to spur a competitive environment across the country, not just within some individual states. The recent union budget was expected to set a comprehensive five-year economic agenda for the country's wholesome growth.

In Budget 2024-25, unique packages were granted to Bihar of Rs 26,000 crore and Rs 15,000 crore to Andhra Pradesh in exchange for political support, resulting in an even wider fiscal imbalance. It's essential to ask why a similar approach has yet to be taken to address the economic growth of other financially distressed states. For example, Punjab, as a landlocked border state facing locational disadvantages, requires a fair platform to compete on an equal footing.

Once a prosperous and progressive state, Punjab grapples with a significant problem of unchecked unemployment stemming from distressed farming and an imbalanced industrial base dominated by 99.7% of small and medium-sized enterprises (SMEs).

Punjab accounts for only 5% of industrial units in the country, with a 3.6% Compound Annual Growth Rate (CAGR) in the industrial sector over the last five fiscal years, ranking 12th. In contrast, the neighbouring state of Haryana has demonstrated higher growth rates at 5.9%.Punjab ranked first in GDP in 1981 and fourth in 2004. In the fiscal year 2023-24, with a GDP of Rs 6.98 lakh crore, the state was ranked 16th.

In comparison, the neighbouring state of Haryana's GDP stands at Rs 11.20 lakh crore, ranked 12th. Interestingly, Bihar, once part of the economically challenged states known as 'BIMARU' (Bihar, Madhya Pradesh, Rajasthan, and Uttar Pradesh), is now a fast-growing economy with a growth rate of 10.6% and a GDP of Rs 8.59 crore in FY 2023-24.

Allowing lopsided economic development in a sensitive state like Punjab will have serious repercussions. Failing to ensure holistic development will ultimately lead to accusations of inefficiency in managing human resources. Unemployment exacerbates various issues in distressed areas, including mental health, crime, and drug abuse. Substantial evidence links drug abuse and law and order problems directly to unemployment. These issues must be addressed assertively to ensure the overall progress and well-being of Punjab.

Economic distress in Punjab has led to unemployment and a significant migration of its human resources to Canada, which has created a breeding ground for radicals and anti-Indian Khalistani extremist activities on Canadian soil; it is a globalised challenge that must be addressed promptly. Secondly, the Pakistan border has been adversely affecting Punjab's economy.

This, along with illegal arms supply and drug-related terrorism, has severely impacted Punjab's social fabric and law and order. The central government has not adequately compensated Punjab for its unique challenges compared to other states. The revenue-sharing disparity is a pressing issue causing significant, alarming socio-economic distress in Punjab. The state receives only 51 paise for every rupee it contributes to the Centre's tax pool, compared to states like Bihar, which receive Rs 1.20. This highlights the urgent need for equitable revenue sharing to ensure Punjab's socio-economic well-being.

Currently, Punjab's contribution to the country's tax kitty stands at approximately 3%, and it only receives 1.8% of the divisible pool of taxes allocated by the Fifteenth Finance Commission. It is concerning that Punjab only received 1.8% of the Rs 8,16,649 crore distributed by the Centre to the states during 2022-23. However, the large areas and population figures of Uttar Pradesh and Bihar provide them with additional leverage from the central tax pool. Uttar Pradesh received the highest share at 18% (Rs 1,46,525 crore), and Bihar received the second-highest share of 10%.

This highlights why Punjab and other states argue they must receive a fair share of funds despite contributing more to the exchequer.During the fiscal year 2022-23, Punjab contributed Rs 32,800 crore to the central taxes fund, which included CGST, income tax, corporation tax, wealth tax, union excise duty, customs, and service tax. However, in return, the state only received Rs 14,756 crore. Punjab has raised the issue with the Sixteenth Finance Commission, which believes it deserves a fair share of central tax. The Finance Commission recommends the distribution of tax revenues between the Centre and States.

Despite recommendations to allocate 42% and 41% of net tax revenue to States, their share of gross tax revenue fell to 35% in 2015-16 and 30% by 2023-24. For 2024-25, the Gross Tax Revenue (GTR) is projected to grow at 11.7%, raising concerns about adequacy in meeting state fiscal needs. The introduction of the Goods and Services Tax (GST) Act has had significant and varying consequences on fiscal federalism.

It has given the Centre more extensive taxation powers, altering the budget landscape and transforming budgetary federalism in the country.

While GST has led to revenue growth, it also restricts the financial autonomy of the states.In a recent memorandum submitted to the 16th finance commission chairman, Punjab highlighted the loss on account of GST introduction, indicating that the state would have earned more than Rs 45,000 crore with VAT versus the budgeted GST of Rs 25,750 crore in FY 2024-25.

This gap is expected to increase to Rs 95,000 crore with VAT and GST at Rs 47,000 crore by 2030-31.

The Way Forward: In the current fiscal federalism, it is crucial to adopt a comprehensive and inclusive approach to budgetary prudence, local employment generation, and social harmony, regardless of demographic and political differences. Devolve more fiscal powers to states, enhancing their flexibility in revenue generation, expenditure planning, and borrowing limits. Reforms are necessary to address imbalances in the revenue transfer system.

A Finance Act amendment is still pending to establish fairness and accountability in managing the resource imbalances between the Centre and the States, which has led to growing regional tensions. Ultimately, fair, competitive, and effective fiscal federalism is essential to ensure that resources result in improved services and infrastructure for citizens.

(The Author is Vice-Chairman of Sonalika ITL Group, Vice-Chairman of the Punjab Economic Policy and Planning Board, Chairman of ASSOCHAM Northern Region Development Council. Views expressed are personal)