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Mainstream, VOL 61 No 27 , July 1, 2023

Punjab’s Economic Development Undersiege: Towards a Strategy for Making Punjab Economy Dynamic | Lakhwinder Singh, Baldev Singh Shergill,

Saturday 1 July 2023



This paper traces the evolution of the economic development process of the Punjab economy since the green revolution. Apart from identifying the factors that have contributed to the rise and fall of the Punjab economy, alternative public policy solutions are suggested to rejuvenate the Punjab economy.

1. Introduction:

Punjab economy over a long period of time has been performing below its potential. Punjab at the turn of the century (2000) was ranked number one, in terms of per capita income. During the last two decades, it has lagged far behind to tenth rank among the major states of India. As per the latest estimates of human development index and multidimensional poverty index, Punjab among the major Indian states is ranked third and fifth respectively. Punjab economy between the period 2015-16 and 2022-23 has recorded 4.7 per cent growth rate of Gross State Domestic Product (GSDP) (GoP, 2023). This implies that Punjab economy has been growing but growing at a slow pace. Consequently, the per capita income of Punjab is progressing more slowly than the national average. As per the estimates of Punjab government, in the year 2022-23, the per capita income of Punjab is Rs. 1, 73, 873 at current prices. In the same year per capita income of the country (India) is Rs. 1, 70, 620 (GoP, 2023). The rate of growth of population in Punjab in the last decade was 1.4 per cent per annum, whereas the rate of growth of all India population was 1.8 per cent (Census of India, 2019). Despite slow rate of growth of population, the per capita income is converging at all India level amply shows that Punjab economy is steadily falling behind even with all India level.

This gloomy economic progress scenario of Punjab has generated an employment famine. As per the government of Punjab estimates, the young workforce of the order of 2, 23, 207 were registered in the employment Bureau in 2022. Out of them, 31 per cent were skilled and the rest of them were educated but unskilled. The high unemployment rates among the educated workforce and high dissatisfaction of the employed youth in Punjab are the major reasons for the Punjabi workforce to seek employment opportunities elsewhere. Those who can move to foreign lands even sell their immovable property and go abroad and those who cannot either fall in the trap of growing illicit business of drugs or remain disguisedly unemployed. This is the army of people readily available for anti-social activities as gang formations and for them the value of human life is diminished to zero. Hopelessness dehumanizes and absolute hopelessness dehumanizes absolutely. Therefore, there is a continuous threat to the peaceful situation in Punjab. The long period slow pace of economic development that could not satisfy the aspirations of the younger generations of Punjab made Punjab state a basket case where neither the central government nor the political leadership of Punjab makes any serious efforts to resurrect/rejuvenate it. The conscious people of Punjab living anywhere in the world are a worried lot and often ask the question why Punjab economy has reached where it is now and what can be done to regain the past glory of Punjab. In this lecture an attempt is made to examine Punjab economy to identify the major factors responsible for making Punjab economy a basket case and what can be done to make Punjab a dynamic and vibrant economy so that it can transition from hopelessness to hopefulness. To provide viable solutions, the evolutionary perspective can be helpful in understanding what went wrong, and lessons learnt can be employed for future course correction.

2. The rise of Punjab Economy:

In the post partitioned Punjab, the government of Punjab has taken steps to rehabilitate people which came empty handed from West Punjab. A swift allocation of productive agriculture land for cultivation and providing loans for construction of houses both in the villages and towns of East Punjab. Punjab government has also undertaken several new initiatives such as abolition of intermediary between the state and the actual cultivators, consolidation of land holdings, imposition of ceilings on land holdings, fixing and regulating rent on tenanted land, and property rights to occupancy tenants for providing security to tenants. These policy measures were undertaken to generate adequate capability for building production base in the agriculture sector of the economy. It was supported by heavy investments in developing irrigation systems via canal network and rural electrification, agriculture credit, regulated grain market system, agriculture research and extension system, and rural road networks. Punjab state policy has succeeded in enacting and developing a network of institutional arrangements during the 1950s and early years of the 1960s that played central role in providing enabling environment for the establishment and flourishing of modern agriculture development. For a balanced growth of Punjab economy, the industrial townships were also established, and necessary training institutes were also established to supply adequate skilled workforce to industrial establishments. The expediency and sufficiency of social services were also ensured. Educational and health care systems were also established for attaining the upward mobility of the population.

When East Punjab was further sub-divided in 1966, it coincided with the food crisis of the country and Punjab state readily accepted the challenge and made the country food self-sufficient in a very short span of time. The green revolution has not only provided food security to the country but made several economic, social, and political changes in the state. The rising agriculture productivity in two crops, that is, wheat and rice, on the one side increased employment, income and savings and on the other side converted agriculture from a diversified to monocropping (specialized). The specialization perpetuated for a long period of time and Punjab state turned out to be bulk producer of wheat and rice for the central pool. However, agricultural development has impacted other sectors of the economy and boosted both industrial development and the service sector of the economy. It has reduced the poverty to the lowest level among the Indian states. The rise of income levels and spread of education have opened not only the opportunities outside agriculture but generated the process of upward mobility and substantially reduced the social segregation and more importantly empowered people of Punjab. This has a far-reaching implication in the political processes in the state, where peasantry has started dominating the political scene of Punjab.

The first phase of the green revolution also made structural changes in the Punjab economy. The share of agriculture in the GSDP of Punjab increased from 52.85 per cent in 1966-67 to 54.27 per cent in 1970-71. As agriculture sector productivity gains started reaching to plateau towards the end of 1970s, the share of both agriculture in GSDP (49.45 per cent in 1980-81) and employment (58 per cent in 1981) started declining (Singh and Singh, 2002). The empowered peasantry has started reflecting the fatigue of agriculture and non-availability of aspirational employment outside agriculture due to stunted growth of the economy by lacking strong backward and forward linkages between sectors. Most of the social movements were emerging with left leanings that sent danger singles to the dominant political parties and instead attending the emerging problems from the model of economic development, they started twisting economic issues to converting it into religious issues. Political movement laced with religious issues well suited to the dominant political parties both regional and national alike. Consequently, turmoil of 1980s devastated the well functional institutions and derailed the development agenda of Punjab. The decade of dominance of bureaucracy and governor rule in Punjab resulted in shifting emphasis of the state from development to security and peace concerns. However, the momentum of development continued in the 1980s, but the pace of economic development decelerated.

3. Post-liberalization fall of Punjab Economy:

When Indian government shifted public policy in 1991 to liberalization, privatization and globalization, Punjab state was struggling to attain peace. Peace and democratic processes were restored in the 1990s with a new incarnation of the political leadership to sink its policies with the nation. Punjab political leadership has turned quite innovative and developed a gridlock with bureaucracy and continued with the policy of ‘business as usual’. Instead of restoring the functionality of institutional structure right from State Planning Board down to the local level, they have started reducing the expenditure on health and education that further crippled the capability and competency building of the younger generation. The ruined governance system turned out to be quite handy to further the interest of the political leadership. During this period, the political leadership in power turned from pure-simple statesmen to business entrepreneurs and as the income of the lay public started either declining or increasing at a slow pace, the wealth and income of the political leaders skyrocketed. I may remind here the august gathering that LPG policy came as a boon for the bureaucracy and political leadership, but it has a doom both for the economy and the people of Punjab. The rent seeking behaviour of the administration generated a multidimensional crisis in the Punjab. This resulted in a drain of industrial capital and most of the new industrial investment from Punjab took place in other parts of the country. The corporate industrial investment and foreign direct investment have also not preferred Punjab as manufacturing and assembly destination for their investment. Along with this, the dismantling of freight equalization policy, two industrial towns (Batala and Mandi Gobindgarh) were almost closed the steel and foundry industry (Dhaliwal, 2010). Jalandhar and Amritsar industrial townships have also contracted due to industrial competition and required support could not come to save the industry.

The terms of trade turned against agriculture over the decades and small agriculture-based farming came under substantial crisis. The substitution of credit for declining income due to rising input cost and efficacy of the inputs that resulted in high degree of indebtedness. Consequently, the farmers, otherwise a very sturdy community, had started committing suicides. The tendency of suicides continued even till today shows that crisis of agriculture is neck deep and acquired multidimensionality.

New opportunities like the information technology revolution were also bypassed Punjab. It was mainly due to non-availability of skilled manpower, incentives to entrepreneurs and congenial business environment. So, the service sector of Punjab has remained quite a traditional one and tradable modern services continued to remain absent. The rent-seeking behaviour in the formal services sector created friction in the economy that sucked essential surpluses of the economy and disincentivized the overall investment scenario in Punjab. According to Sanyal and Singh (2022), Punjab’s lack of economic diversification is a plausible explanation for its lagging economic performance.

Over the last four decades, Punjab economy has developed deficiency of investment. The evidence of 14 percent gross fixed capital formation (GFCF), as reported in the 2022-23 Economic Survey of Punjab, amply shows why Punjab economy is lagging in the development process, whereas all India gross fixed capital formation is around 29 per cent. The drain of both capital and humans has dried up the growth prospects of Punjab. Thus, Punjab has fallen into the multidimensional trap of slow growth-low investment-high indebtedness.

4. Public Policy Lessons for Rejuvenation of Punjab Economy

Now the question arises can we resurrect/rejuvenate/rebuild the Punjab economy? The answer is in the affirmative. For this, one is expected to identify the major constraints or roadblocks faced by the Punjab economy.

The first and foremost constraint is accumulated debt of the order of Rs. 3.05 lakh crore in the end March 2022 (Table 1). Based on latest three-year average, Punjab government has borrowed Rs. 35,201.87 crore annually. But to service accumulated debt, it pays (interest payments Rs. 18209.8 crore + repayment of principal Rs. 14257.98 crore) Rs. 32467.78 crores. The net availability of the borrowed funds turned out to be Rs. 2734.09 crore, which is just 7.8 per cent of the total borrowings. This clearly brings out the fact that 92.2 per cent of the borrowed funds were used to service the debt. It gives a fair idea about the vicious circle of debt in which Punjab economy has fallen. This evidence clearly shows that the Punjab government is neck deep in debt and this debt trap is a drag on the revival of economic development process of the state. Several observers have alluded to the potential risk that large debts may discourage capital accumulation and reduce economic growth. It is stated that the budget management capabilities of the state have had a decisive impact on the rise in govt. borrowing and on economic growth. Moreover, according to Das (2016) there has been a marked deterioration in the fiscal health of all states in India since the early 1990s, which reached a peak in the mid-2000s in almost every state in India.

Can Punjab government overcome the debt traps? When we investigate the revenue raising capacity of the state government, the empirical evidence shows that Punjab government is consistently incurring revenue deficit of the order of more than two per cent of the GSDP. The revenue deficit-GSDP ratio was 2.56 per cent in 2018-19 and increased to 3.23 per cent in 2020-21. In the ongoing year (2022-23), the revenue realization so far is 63 per cent of the target. This evidence clearly brings out the fact that Punjab state is expected to increase the revenue deficit to GSDP and will add further to the accumulation of debt. The fiscal policy is under siege and revival of it is most important for the revival of Punjab economy. Several studies conducted on the impact of monetary policy on the states of India clearly brings out the fact that Punjab economy has been adversely affected due to predominance of small-scale production structure of the economy. This is also reflected in the RBI’s statistics on the credit-deposit ratio, which for a long period of time could not fulfill the statutory minimum ratio and currently this ratio is 55 per cent in the year 2021-22. This is due to the unitary banking system. Despite the high rate of savings, Punjab could not be able to convert it into productive investment. Therefore, it has resulted in investment deficiency in the Punjab economy. In this context, Kumar and Woo (2010) argued that this adverse effect largely reflects a slowdown in labour productivity growth mainly due to reduced investment and slower growth of the capital stock per worker. The increasing centralization of both monetary and fiscal policies has initiated the process of crowding out investment from Punjab, which has adversely affected the economic growth process of the economy of the Punjab state. According to Tales, Hammond and Takash (2021), maintaining a healthy relationship between revenues and spending is always important as a basic matter of democratic accountability, and wasteful spending not well calibrated to serving important public goals is always to be decried.

Table 1 Rising Outstanding Debt of Punjab

Source: RBI State Finances: A Study of Budgets (Various Years) and OTR- Own Tax Revenue, TRR- Total Revenue Receipt. Note: During 2006-07, Term loan of Rs.3772 crore waived-off by Govt. of India.

Second important factor that is a drag on the faster progress of Punjab economy is its production and employment structure. In net shell, Punjab economy has overstayed in agriculture, and industrial sector remained both a minor sector and low-productivity-low wage rate. The employment in the industrial sector cannot satisfy the aspirations of the local labour. However, the transformation of the Punjab economy is required to be transitioned from a predominantly agrarian to industrialized one. Twenty-first century is called knowledge economy and is also witnessing fourth industrial revolution.
Punjab state urgently needs to harness the new technologies. This requires new strategy to shift industry from traditional to modern that too green industrialization. Punjab government should establish a new head in the budget called Research and Development (R&D) for a green industrial push. Moreover, the stand-alone sectors do not generate economies of scale. Therefore, it is suggested that new initiatives should take care of the interdependence of the economy. Service sector should be reoriented in a manner to serve the productive sectors of the Punjab economy.

The third constraint is the skill base of the workforce. It is well known that Punjabis are considered to be superior in entrepreneurial and leadership qualities. This advantage has been undermined by the long-term slow progress of the economy and dysfunctionality of educational and health institutions. Wholesale privatization in both education and health has not achieved the goal of generating superior capabilities of the workforce. Therefore, the revamping of the educational and health infrastructure is the need of the hour. Public policy can only allocate required resources in the education and health sectors for their reorientation if the government able to liberate its fiscal policy and make appropriate use of monetary policy to generate not only enough revenue but also investment.

Fourth, public policy, implementation and evaluative institutions have played an important role in the process of development in the early stages of economic development of Punjab but turned dysfunctional since the 1980s and occupied by the bureaucracy. This has sieged the feedback system in public policy making and failures are not punished, and successes are not rewarded that has lowered moral of the efficient public servants. Until the three wings of policy making, policy implementation and policy evaluation are not made independent, the public policy process will not deliver the results. To make Punjab economy dynamic, this step of functionality of public policy institutions needs to be activated.

Last but not least, Punjab has been reeling under predominance of the agrarian culture. The hot cultural temperament and exploitation of religion for political purposes generated communal tension and consequent insecurity of life and property has been proving a great hindrance to invest in Punjab. The culture of rent-seeking both political leadership and bureaucracy has made Punjab unfriendly for industrial investment of the diaspora and private corporate sector alike. These factors combined played an important role in discouraging industrialization in Punjab, despite having created all possible favorable conditions based on high productivity, agriculture generated enough investible surpluses.

On the whole, Punjab and even neighboring states (Himachal Pradesh, Haryana, Jammu and Kashmir) will benefit if the international border is softened and land route trade is opened up to Pakistan and other countries. The political leadership of Punjab should seek cooperation from other states to convince the Union Government to release this constraint of fear from the minds of investors.

For inclusive and sustainable development, the Punjab government is expected to rise on the occasion and overcome the long-standing constraints on the economy. A strategy of collective action can be pressed into service for making Punjab’s economy not only push aside constraints but making Punjab a 21st-century model of economic development.

(Authors: Lakhwinder Singh, Institute for Human Development (IHD), New Delhi (lakhwindergill[at]; Baldev Singh Shergill, Department of Economics, Punjabi University South Campus, Talwandi Sabo, Bathinda.


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