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Punjab's Slowing Economy
Punjab was once synonymous with prosperity but has lost its coveted tag fast with decline in agriculture and industrial output
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In the mid-80s, Punjab was gripped in militancy, violence and chaos but still one positive thing which kept Punjab going was its relative prosperity and its robust economic status. Without these Punjab would have gone into oblivion, from where returning to normalcy would have been tough.
If we go by the statistics, then in 1994 Punjab was number one state in terms of per capita state GDP. But after that we saw a continuous slide in stature of Punjab and now slipped to number 9 after 22 years. This is not only worrying position for state but also it has severe impact on India, hence I tried to find out some key reasons.
So, Punjab was synonymous with prosperity but has lost this coveted tag very fast. Let's see why. There are many reasons why Punjab's economy is in trouble.
The Punjab government spends approximately 50% of its total revenue on government employee’s salary and pension. This is way too high. The same for Haryana is 37%, Rajasthan 34%, Gujarat 36% and Tamilnadu 37%. This means either revenue is low or Govt machinery is heavy.
Due to model of high expenditure and low revenue generation, almost 20% of his tax revenue goes towards payment of interest on borrowed money i.e one fifth of revenue goes away. Punjab's outstanding debt is 32% of GDP while the same figure for rest of India is 21%.
For almost last 10 years,Govt is giving free electricity to farmers. This is burden on debt ridden Govt. Approximately 8-10% of total revenue goes towards free electricity subsidy.
Hence if we add salary, pension, interest and electricity subsidy the total comes to 80% of state revenue therefore Punjab government gets only remaining 20% to spend on infrastructure, industrialization and job creation.
Punjab was traditionally agrarian economy. Now Indian agriculture in general is in trouble hence Punjab is worst affected. Agriculture used to contribute 40% of Indian GDP in mid 70s which is down to 16% currently. This figure is enough to tell declining status of agriculture.
Use of fertilizer and pesticide by Punjab farmers are is 7-10 times more than national average. In Punjab daily wages are also high hence cost of production automatically goes up. Now once India has become food grain surplus country the minimum support price ( MSP) is not increasing with ratio of inflation/input cost and this leads to unviable business proposition. It’s shameful that Punjab farmers are committing suicide.
Tractor density is highest in Punjab. Various research shows that owning tractor for small & marginal farmer is not viable. In Punjab, Tractor became status symbol for farmers i.e bigger tractor means bigger farmer. This led to unnecessary purchase of higher horsepower tractor i.e costly one which further worsen the debt ridden farmers.
Ludhiana was hub of SME (Cycle manufacturing, sports good manufacturing, hand tool manufacturing, hosiery etc). Twenty years back Ludhiana was known as city of Merc because of wealth but once central government started giving tax exemptions to nearly by hilly states like Himachal Pradesh, Uttarakhand and J&K, lot of SMEs shifted to these states to save tax. Baddi is small city in Himachal Pradesh on the border of Punjab. Baddi is just 50 KM from Chandigarh and 150 KM from Ludhiana hence it became hot place for shifting base and get excise as well as other tax exemption for 10 years. This impacted Ludhiana majorly.
Cycle manufacturing is still big industry in Ludhiana but now Chinese cycle as well as parts are so cheap that most of Indian cycle manufacturer have started purchasing cycle parts from China so that they can keep themselves afloat. Due to this small local cycle component manufacturer had to close the business.
Jalandhar was hub of sports good manufacturer. 1992 FIFA world cup was played with mostly Jalandhar manufactured football. After this China started manufacturing sports good in big way. The mass production and new technology given edge to Chinese manufacturer. Due to this our Jalandhar produced sports goods became 30% costlier than Chinese made hence slowly and steady entire sports good manufacturing industry of Jalandhar started crumbling.
Most of Industry in Punjab is labour intensive. Due to higher cost of living in Punjab the labour wages also gone up. Land price is also more than other part of India. Punjab gives commercial electricity at Rs 7-8/unit while other states offered cheap land and electricity @ 5/unit. labour rates are also relatively cheaper in other. This led to lower cost of operation in other states like MP, Gujarat, Maharashtra etc. Most of big cotton Industry players of Punjab have expanded in their business in these states.
The technology that SMEs of Punjab were using for production was outdated.
Unfortunately they didn't invested in Research & Development. Their apathy towards new technology as well as up gradation of the operation has costed them and Punjab dearly.
NRI remittance to Punjab was major economy booster before sub-prime crisis in the US. Once economy of the US, Canada and UK gone down the remittance also gone down.
Real estate was major sector which was contributing to economy. Property prices were doubling in 3-4 years hence people invested heavily. Lot of businessmen who had taken loan against their manufacturing business diverted the bank loan to purchase property but once property prices declined or got stagnant the entire cycle got stuck.
Drug consumption in youth of Punjab has impacted economy in big way. One of leading news daily says, "In the northern Indian state of Punjab, more than half of people ages 18 to 35 are using drugs, and at least one person is addicted in two-thirds of rural households."
State governments are not considered as pro-industrialist. They want vote from farmers hence don’t want be seen as industry sympathizers. One study shows that 90% of Punjab state assembly debate moves around farmer.
One of the major reasons of India’s exponential growth in last 2 decade is FDI post-liberalization but Punjab hardly got any FDI/investment hence Punjab could not take advantage of liberalization.
For better living standard, Punjab youth are more inclined to migrate to Canada, US, Australia and Europe. After migration, people work as drivers, fuel station assistant, running general store etc. For this higher education not much required. This phenomenon leads to lower focus on higher education by rural youth of Punjab.
Next generation of businessmen is more keen to settle abroad hence this demotivates businessmen to further expand their business.
Debt ridden Punjab government wants to increase revenue hence conducting lot of raids on businessmen. Imagine the plight of businessmen that on one hand his business is not doing well and on another had he is being harassed by tax department. Honest businessmen do admit that corruption is so much that to avoid unnecessary hassle they need to manage corrupt officers. This is also one of reason why many businessmen of Punjab are registering new firms in Delhi/Mumbai. They say it's good to be a small fish in a big pond rather than be a big fish in a small pond.
Despite all the negatives, I am very sure that Punjab will bounce back in next 3-4 years. Now people are realizing their mistakes. Unions as well as the state government are also trying to revive industrial production. Therefore, I am optimistic about revival of Punjab economy, it might take time but it is inevitable.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.