A resource crunch in Punjab seems inevitable despite claims of improved tax collection, except for the agriculture tax owing to a prolonged drought. Although new taxes have been ruled out, the Punjab finance minister has spoken of plans to rationalise the existing ones, implying that an upward revision in the tax structure, which will put added burden on the tax payers, is on the cards.

Inadequacy of resource mobilization, despite the reduction recorded in annual budget deficits in recent years, remains a major constraint in meeting budgetary needs and the challenge of development. On the other hand, the provincial government not only has to finance its development plans, but is also responsible for the operation and maintenance of ongoing services which are its fundamental responsibility, in spite of low potential for revenue generation and heavy dependence on the federal government.

In terms of delivery of basic social and economic services like education, health, water supply and sanitation, roads and irrigation, the task of development and improvement of quality of life of the people has assumed increased importance after the induction of district governments making an increased claim on provincial resources.

The outlook is, however, clouded by reduced revenue transfers to the provinces which have reportedly experienced a five to 10 per cent cut in their respective direct federal transfers during the last four years because of the continued shortfalls in revenue. There are reports that the CBR’s inability to meet the downward revised target for the current financial year has forced the government to pass on the impact to the provinces in accordance with their share in the national income.

Defence budget and debt-servicing obligations were already major constraints facing the federal government in tackling the provinces financial squeeze. More recently, rising tensions on the borders have also raised the spectre of reduced flows from the centre. However, a somewhat reassuring disclosure was earlier made by the Punjab finance minister in a reference to the NFC Award that an inter-provincial consensus had been reached on the income - expenditure benchmark. This should help to clear the way for the availability of badly needed resources in meeting budgetary requirements.

The Punjab’s share from the federal transfers from the divisible tax pool had dipped 6.49 per cent in 1999-2001 because of lower than estimated collection of taxes by the CBR. The revised estimates for the 2000-2001 budget showed the transfers from the federal divisible pool on the basis of actual collection came down to Rs 81.136 billion from the estimates of Rs 86.771 billion. Punjab had pitched transfers from the divisible pool during 2001-2002 at Rs 91.771 billion in last year’s budget. The estimate of its share in the tax pool was expected to increase by 5.7 per cent the following year over fiscal 2000-2001, which was still below the projections of the 1997 NFC Award. However, the straight/other transfers rose 56.44 per cent to Rs 4.687 billion in the revised estimates from the budgetary estimates of Rs 2.996 billion during 2000-2001. The province hoped to receive Rs 5.332 billion — 78 per cent higher than the estimates for fiscal 2000-2001— under this head during 2001-2002. The increase is mainly attributable to the inclusion of the GST on provincial services in this category of transfers.

Although Punjab had been advocating resource distribution on the basis of population, latest reports indicate that it was getting only about 44 per cent in real terms from the entire resources taking into account all federal transfers from the divisible pool (for nondevelopment expenditure) under the NFC Award, straight transfers as well as development funds given to the provinces.

There is the additional burden of debt liability which has reached Rs 116 billion in spite of payment of staggering amounts on the principal as interest which has doubled from 9.25 per cent in 1973-74 to 17.70 per cent in 1998-99. A relief of Rs 0.8 billion obtained after clearing around Rs 16.5 billion in debt is small comfort. The federal government, according to the Punjab finance minister, would also increase the provincial share from the sales tax by 2.5 per cent that would double the income from this head. The Punjab government also has asked the centre to allow it to levy the GST on services. However, it wants that tax realization should be the responsibility of the federal government, whereas for the future, the province has decided to opt for grants, which has a concessional element, instead of project loans.

A narrow resource base demands that Punjab should also explore other options to mobilize revenue such as royalty from cotton and wheat just as the NWFP had been receiving it for water and Balochistan for gas. Punjab pays for the electricity and gas it uses in the production of wheat and cotton, accounting for three -fourths of the total national output of these crops. With an increase of 38 percent amounting to Rs 129,550 million envisaged in the Punjab expenditure during 2002-2003, a higher quantum of funds for such key sectors as education, health and agriculture would be necessary. In the immediate aftermath of the 1999 NFC Award, there was a significant increase in the flow of funds from the federal government. The revenue surplus of the provincial governments combined increased to Rs 5 billion in 1991-92. The finance of individual provinces showed an improvement, with Punjab and Balochistan generating the largest revenue surpluses of about Rs 1.7 billion each. In 1994-95, provincial governments generated a combined revenue surplus equivalent to 7.4 per cent of current expenditure. The province’s own receipts financed the highest proportion, 18 per cent, of recurring expenditure in Punjab whereas the ratio in the case of Sindh was about 16 per cent, with Balochistan financing less than six per cent of its current liabilities in 1994-95.

As far as development activity in the provinces was concerned, Balochistan had the largest proportion of expenditure devoted to development works, of 33 per cent, followed by Sindh at 30 per cent and NWFP at 20 per cent. The share of development expenditure to the total expenditure of Punjab was relatively low at 19 per cent. Overall, a comparative analysis of the provinces indicates that Punjab had the highest ratio of its own revenue to recurring expenditure but the lowest share in development expenditure in the budget.

In the 1999-2000 budget, an increase of only about 3 per cent was targeted for development expenditure. In 1999, the province has had to cut its development programme by Rs 2 billion, since budgetary provisions have not been forthcoming from the federal government. The following year the province cut short its development budget by around Rs 3.4 billion from Rs 15 billion. Compared to the allocation of Rs 21.131 billion during 1999-2000, the ADP for 2000-2001 was short of Rs 1.132 billion. In this context, efforts of the Punjab government to augment its development activities may not go far.

Financing development through borrowings had been a major plank of Punjab’s policy. Most of the borrowing has been in the form of soft federal loans or foreign assistance while the provincial economy had been under considerable pressure of loans from these sources. The province started relying on cash development loans from 1982-83 when it borrowed Rs 1.408 billion. Although the government did not borrow during fiscal 2000-01, the size of the borrowing continued to rise to an all-time high of Rs 7 billion in 1990-91.

Under the devolution plan, increased stress is being laid on local development. Whether enough resources would be available when the focus of the federal government is on macro-economic stabilization through reduction in expenditure, including developmental, or uplift expenditure will bear the brunt of deficit reduction, remains to be seen.

In the coming budget, an increase of Rs 9 billion is reported to have been made in the allocation for education. To increase the export potential of the province, export processing zones are being set up in Lahore, Faisalabad and Gujranwala, while a similar facility will soon be opened in Sialkot. Punjab must devote higher resources for the development of its neglected agriculture sector. Currently, irrigation is in bad shape. It is necessary to increase the efficiency of the network in view of the water scarcity which is likely to stay with us for quite some time.

Building reservoirs and barrages to enhance storage and water delivery capacity is a pressing requirement. It is encouraging to note that the government is allocating Rs 2.5 billion for the Jinnah and Khanki barrages, but much remains to be done to meet the needs of agriculture. Better inputs, including disease-resistant varieties, and other rural uplift schemes and improving the economic infrastructure for higher returns from farming can play a key role in transforming the lives of the people. Improving the condition of the rural population through income-generating schemes should be a major priority.Raising rural living standards through job creation, access to education, health, nutrition, housing and other social welfare services as well as improving the capacity of the rural sector to achieve long-term sustainability in terms of resource generation and cost-effective expenditure will help to reduce rural-urban disparities and also check migration from the villages.

Social sectors, including health and education still suffer from low allocations. But higher allocations in themselves are not enough. It has to be seen whether the people are benefiting from the development budget. Currently, most departments take months before laying their hands on the ADP utilization. And when projects are undertaken in haste towards the end of a fiscal year, corrupt practices cannot be ruled out. The Punjab finance minister said that 65 to 68 per cent of the allocated funds for development would be used during the current fiscal year. This does not seem to be realistic in view of the ground realities. Better enforcement and discipline in the approval of projects is essential so that investment portfolios of schemes carried from year to year are kept within manageable limits and adequate allocations made for ongoing programmes.