Punjab Govt has been Living on Debt
State’s liquidity situation became worrisome in 2011-12 and it is now using RBI’s advances facility almost every day
Mumbai: Once the richest state in the country, Punjab now seems to be caught in a chronic liquidity crisis with the state government emerging as one of the largest borrowers of the Reserve Bank of India’s temporary lending facility.
The government of Punjab has regularly availed RBI’s ways and means advances (WMA) facility — a temporary liquidity support extended to central and state governments for a few days — to meet its temporary revenue mismatches in the government’s cash flows, according to a report by ratings firm India Ratings.
The state’s liquidity situation became worrisome in 2011-12 and aggravated almost every year. In FY17 (budget estimate), Punjab proposes to use .₹ 19,500 crore from WMA facility, up from .₹ 17,000 crore in FY16 (revised estimate) and .₹ 9,268 crore in FY15, the report said. And the Punjab government has been using this facility almost every day; it availed this facility 315 days in FY15, up from 136 days in FY12. The number of times it has availed an overdraft after exhausting the WMA limit too, has been going up, indicating the precarious state of Punjab government’s finances.
WMA is a facility governments use in addition to regular market borrowings. It is offered at prevailing repo rates and at an additional penal rate of 2% in case of overdrawing. The facility was introduced in1997 in order to restrict liquidity support from the RBI by governments and discontinue automatic monetisation of debt, a practice under which governments borrowed without restrain.
Punjab’s liquidity problem is so acute that from time to time the government has even used mortgaged assets such as Gandhi Vanita Ashram for widows in Jalandhar and state jails at Bathinda, Amritsar and Goindwal to raise cash from banks, India Ratings said.
The liquidity squeeze has been compounded by rising debt. Punjab’s total outstanding liabilities have more than doubled since FY09, and is the second highest among non-special states as a percentage of gross state domestic product at 31.4% (FY16 budget estimate).
The debt situation is expected to worsen as the government proposes to take over .₹ 15,632 crore debt from the Punjab State Power Corporation Limited under Ujwal Discom Assurance Yojana. Recently 30 banks led by the State Bank of India decided to freeze lending to Punjab following reports that stock of food grains worth .₹ 20,000 crore against which banks had lent to state government agencies went missing from godowns in Punjab. The state has claimed to have procured these food grains after taking loans from these banks.
As a result, RBI had asked the banks to make provision for losses on food grain-related loans issued to the state.
The central bank has allowed the state a cash credit limit of .₹ 17,523 crore towards the first instalment for wheat procurement during the ongoing rabi season.