When the Aam Aadmi Party (AAP) came to power in Punjab in March 2022 under Chief Minister Bhagwant Mann, it secured an overwhelming mandate of 92 out of 117 Assembly seats. The government promised free electricity, better education and healthcare, employment opportunities and an aggressive campaign against corruption. Four years later, however, the political debate is increasingly being overshadowed by a difficult fiscal reality. Punjab continues to operate with a very large annual budget, but a substantial portion of its revenue is already committed to salaries, pensions, interest payments and subsidies, leaving limited fiscal space for long-term development.
For 2024-25, Finance Minister Harpal Singh Cheema presented a budget of approximately ₹2.06 lakh crore. Revenue expenditure alone was projected at ₹1,27,134 crore, covering salaries, pensions, interest payments, grants and subsidies. Punjab’s committed expenditure has become one of the biggest challenges for the state government. In 2024-25, the state was expected to spend about ₹78,868 crore on committed expenditure, including approximately 34% on salaries, 23% on interest payments and 19% on pensions, against estimated revenue receipts of ₹1,03,912 crore. The figures underline how little flexibility remains once the government’s unavoidable obligations are met.
The biggest concern is the relatively limited share of spending available for capital creation. Capital expenditure is the money used to construct roads, schools, hospitals, industrial infrastructure and other assets that can generate economic activity in the future. In 2023-24, capital expenditure was only around 3.44% of total receipts. This creates a structural problem: Punjab is spending a large share of its resources on running the existing system and servicing its accumulated debt, while comparatively less is being invested in creating new productive assets.
Free Electricity: Relief for Citizens, Pressure on the Treasury
The AAP government’s decision to provide 300 units of free electricity every month to eligible households has become one of its most politically significant welfare measures. The scheme has provided considerable relief to families, but it also carries a substantial financial cost for the state. In 2023-24, power subsidies accounted for more than 25% of revenue receipts. The central policy question is therefore not simply whether free electricity should continue, but whether the subsidy structure can remain financially sustainable over the long term.
Punjab’s fiscal position cannot be assessed only through its expenditure. There have also been positive developments on the revenue side. GST collections increased by 15.67% in 2023-24 compared with the previous year, while excise revenue increased by around 10% and VAT collections by 10.89%. Stamp and registration revenue also recorded a sharp increase in July 2024. The government has argued that stronger tax collections indicate that Punjab’s economy is moving in the right direction. However, sustained revenue growth will need to remain significantly strong if the state is to simultaneously fund welfare commitments, development and debt servicing.
Punjab’s Growing Debt Burden
Punjab’s debt crisis did not begin with the AAP government. The state accumulated substantial debt under successive Congress and Akali-BJP governments over several decades. Nevertheless, the debt trajectory since 2022 remains an important issue for assessing the AAP government’s fiscal management.
When AAP assumed office in March 2022, Punjab’s outstanding debt was around ₹2.83 lakh crore. By March 2026, the state’s outstanding debt was projected to cross ₹4 lakh crore, representing an increase of approximately ₹1.33 lakh crore over four years. According to figures cited in parliamentary discussions, Punjab’s debt-to-GSDP ratio has been placed at around 46.6%, making it one of the most highly indebted states in the country. A high debt-to-GSDP ratio means that the state’s liabilities are becoming very large compared with the size of its economy.
The problem is not simply the absolute amount of debt. Punjab faces a combination of a relatively weak revenue base, a growing interest burden and insufficient productive investment. Interest payments alone consume a substantial portion of the state’s revenue. When a large share of annual income is used merely to service old loans, fewer resources remain for infrastructure, industrial development, education, healthcare and other productive investments.
Where Is Punjab’s Money Going?
The structure of Punjab’s expenditure provides an important explanation for its financial difficulties. During the first ten months of 2023-24, the state recorded revenue receipts of approximately ₹69,490 crore. A significant share was consumed by salaries, pensions, interest payments and power subsidies. Interest payments alone accounted for more than one-fifth of revenue receipts, while salaries and pensions absorbed another very large portion. Power subsidies added further pressure.
This creates a difficult fiscal cycle. The government needs money to maintain public services and honour its existing commitments. At the same time, it has limited resources available for investment that could expand the state’s future revenue base. If borrowing is increasingly used to meet recurring expenditure rather than to create productive assets, the state can find itself borrowing more simply to maintain the existing system.
Can Punjab Repay Its Debt?
The Punjab government’s position is that the debt can be managed through better financial management, restructuring and economic growth. Finance Secretary Ajoy Kumar Sinha stated that during the three years from 2022 to 2025, Punjab borrowed approximately ₹1.32 lakh crore while repaying around ₹1.05 lakh crore, including about ₹46,200 crore in principal and ₹59,000 crore in interest.
One of the government’s strategies has been to restructure older, high-interest loans. The administration has been negotiating with financial institutions to reduce the cost of legacy borrowing, with some loans carrying interest rates of 11-12% being targeted for restructuring at rates closer to 7%. If successful, such restructuring could reduce Punjab’s future interest burden and provide some relief to the state’s finances.
However, the borrowing pattern remains a major concern. For 2025-26, Punjab planned to raise approximately ₹49,900 crore in fresh loans while allocating around ₹18,198 crore toward principal repayment and ₹24,995 crore toward interest payments. The fact that a very large proportion of new borrowing is effectively absorbed by debt servicing demonstrates why Punjab’s finances are vulnerable to a debt-cycle problem.
The Road to Fiscal Recovery
Punjab’s long-term financial recovery will require more than simply borrowing at lower interest rates. The state needs to expand its revenue-generating capacity while controlling expenditure that does not create long-term economic value. One major area for review is subsidies. Welfare programmes can provide essential support to citizens, but their design must be financially sustainable. A more targeted subsidy system could potentially protect vulnerable households while reducing unnecessary fiscal pressure.
Punjab also needs substantially greater capital investment. Roads, industrial infrastructure, logistics, technology, irrigation, education and healthcare infrastructure can strengthen productivity and generate future revenue. Increasing capital expenditure would therefore be more than a spending decision; it would be an investment in the state’s future economic capacity.
Economic diversification is equally important. Punjab cannot rely overwhelmingly on agriculture and traditional sectors if it wants to create a stronger tax base. The state needs to attract investment in manufacturing, information technology, services, food processing, logistics and other emerging industries. A larger and more diversified economy would give the government a broader base from which to collect revenue.
The state has also sought greater financial assistance from the Centre. Chief Minister Bhagwant Mann has approached the 16th Finance Commission seeking a special financial package, including a demand of approximately ₹1.32 lakh crore. The government argues that Punjab’s special circumstances and existing debt burden require additional fiscal support.
Economic growth remains the other major component of the government’s strategy. If Punjab’s GSDP grows faster than its debt, the debt-to-GSDP ratio can gradually improve even if the absolute amount of debt continues to rise. But this strategy depends on sustained and broad-based economic growth rather than growth driven primarily by government spending or borrowing.
The Bottom Line
Punjab’s debt problem is neither entirely the creation of the AAP government nor something that can be ignored by blaming previous administrations. The state entered 2022 with a substantial debt burden, but the continued accumulation of debt under the present government raises legitimate questions about the sustainability of its fiscal model. The central challenge is whether Punjab can move from a system dominated by salaries, pensions, subsidies and debt servicing toward one that generates stronger revenues and invests significantly more in productive assets.
The state’s financial position is not necessarily beyond repair, but the warning signs are serious. If borrowing increasingly becomes necessary to repay earlier borrowing and finance recurring expenditure, Punjab could become trapped in a cycle in which an ever-growing share of future revenue is committed to the past. The way forward will require disciplined borrowing, subsidy reform, stronger revenue collection, economic diversification and much greater investment in productive infrastructure. Punjab’s future fiscal health will ultimately depend not on how much money the government can borrow, but on how effectively it can convert public spending into sustainable economic growth
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