Punjab, once considered the economic powerhouse of India, is now facing a severe financial crisis with mounting debt that threatens its fiscal sustainability. The state that led India’s Green Revolution and was once a symbol of prosperity has transformed into one of the most financially distressed states in the country. This comprehensive analysis examines the complex web of factors that have led Punjab into this precarious financial situation.
The current debt situation in Punjab is alarming and continues to deteriorate rapidly. Punjab’s debt is projected to exceed Rs 4 lakh crore in 2025-26, with outstanding debt expected to touch Rs 3.74 lakh crore in the 2024 budget. The state’s debt-to-GDP ratio reached 48.98 percent in 2020-21, making it one of the most indebted states in India. What makes this situation particularly dangerous is that 86% of new loans are being used merely to repay old debt, indicating that Punjab has fallen into a classic debt trap where borrowing is primarily driven by the need to service existing obligations rather than fund development or productive activities.
The largest contributor to Punjab’s financial woes is the massive power subsidy bill, particularly for the agricultural sector. Power subsidies have skyrocketed from Rs 5,059 crore in 2012-13 to approximately Rs 20,500 crore currently, with nearly Rs 10,000 crore allocated specifically for the farming sector. In 2023-24 alone, the state allocated Rs 8,881 crore for agriculture power subsidy. The current budget allocates Rs 9,330 crore for agricultural power subsidy and Rs 7,780 crore for domestic consumers who receive zero bills for consumption under 300 units per month. This exponential growth in power subsidies represents the single largest drain on the state’s finances and has created an unsustainable burden that grows year after year.
The debt crisis has deep political roots, stemming from decades of what experts term “competitive populism.” This trend began in 1997 when Chief Minister Rajinder Kaur Bhattal announced free electricity for farmers with small holdings, setting a precedent that subsequent governments felt compelled to not only continue but expand upon. Each political party, in its bid to win elections, has introduced increasingly generous welfare schemes without adequately considering their long-term fiscal implications. This political dynamic has created a situation where reducing subsidies has become politically suicidal, trapping the state in an ever-expanding web of financial commitments.
The burden of interest payments has become crushing for Punjab’s finances. Interest payments have increased dramatically from Rs 6,831 crore in 2012-13 to Rs 19,905 crore in 2022-23, and currently, almost Rs 24,000 crore goes toward interest payments alone. This means that a substantial portion of the state’s revenue is consumed by servicing debt before any money can be allocated for development, welfare, or even basic governance functions. The compound effect of these interest payments creates a vicious cycle where the state must borrow more money to pay the interest on existing debt, further increasing its overall debt burden.
A significant factor worsening Punjab’s financial situation is the reduction in support from the central government. The discontinuation of GST compensation grants and reduction in revenue deficit grants have hit Punjab particularly hard. In 2022-23, the state received grants worth Rs 16,143 crore under these heads, which is estimated to decline to just Rs 1,995 crore in 2024-25. This dramatic reduction in central transfers has forced Punjab to rely more heavily on borrowing to meet its expenditure commitments, accelerating its descent into debt.
Beyond power subsidies, Punjab has implemented various other welfare schemes that continue to strain the budget. These include free travel facilities for women in public transport and numerous other populist measures introduced by different governments over the years. While these schemes may have social benefits, they collectively represent a significant ongoing financial burden that the state struggles to sustain given its revenue constraints.
The free agricultural electricity policy has created particularly perverse incentives and a vicious cycle of dependency. As water resources in Punjab continue to deplete due to intensive farming practices, farmers require ever more energy to pump groundwater from greater depths. This increased energy consumption necessitates higher subsidies from the government to maintain the “free” electricity promise. The result is that the government finds itself continuously increasing subsidies not because of policy choice, but because of the structural requirements created by environmental degradation and unsustainable agricultural practices.
The current budget allocation reflects the extent to which debt servicing and subsidies dominate Punjab’s finances. While Rs 13,784 crore is earmarked for agriculture and Rs 16,987 crore for education, another Rs 7,780 crore is allocated specifically for providing free power to households. The 2025-26 budget anticipates an additional Rs 34,201 crore increase in debt, indicating that the trajectory toward fiscal collapse continues unabated.
This debt crisis represents a fundamental structural problem where Punjab’s revenue generation capacity has not kept pace with its expenditure commitments. The rapid year-on-year increases in subsidy handouts are evidently unsustainable in the long run and severely limit the state’s fiscal flexibility. The state finds itself unable to reduce expenditures due to political constraints while struggling to increase revenues sufficiently to bridge the gap.
The heavy debt burden has severe implications for Punjab’s development prospects. With such a large portion of the budget going toward servicing existing debt and maintaining unsustainable subsidy schemes, the state has little fiscal space left to invest in infrastructure, healthcare, education, and other development priorities that could help build a more sustainable economic future. This creates a dangerous long-term scenario where Punjab’s inability to invest in its future further undermines its economic prospects and revenue generation capacity.
Experts have proposed various solutions to address Punjab’s debt crisis. They suggest that the Punjab Government should establish a commission for the rationalisation of freebies and subsidies and find innovative ways of generating new revenue resources. Economists argue that Punjab must adopt long-term measures to revive its economy and bring the state back on track. However, implementing such reforms requires significant political will and the ability to withstand short-term political costs for long-term fiscal sustainability.
Punjab’s debt crisis is ultimately the result of a perfect storm of factors: decades of populist policies, particularly unsustainable power subsidies, combined with reduced central government support, the compounding effect of interest payments on accumulated debt, and the political inability to make hard choices about fiscal priorities. Without significant structural reforms, a fundamental reassessment of subsidy policies, and the development of new revenue sources, Punjab’s financial situation is likely to deteriorate further, potentially leading to a fiscal emergency that could have serious implications not just for the state but for India’s federal financial system as a whole.