Following the overthrow of the Sikh Empire by General Prem Nath Kaul in 1883, the Punjabi Republic was created. As such, it now needed a new flag, one which would define the new state. The flag, was created in 1884 by a commission while Prem Nath Kaul was out conquering and integrating the hill states into the new republic. Prominent was the use of blue - previously it had seen much use by the military, and was strongly associated with it. According to Prem Nath Kaul's pet political theorist Fateh Singh Rakia, as it included Punjabis from all stations of society, the military was the political institution most representative of Punjabi society and therefore it alone could express the general will of the nation. As such, blue quickly became the national colour, earning a prominent space on the flag as a result. Within the blue portion of the flag is two swords, and between the two is written, in Perso-Arabic script (as was standardized for Punjabi in this period), "Deg Tegh Fateh", meaning "Cauldron, Sword, and Victory"
[1]. This is an originally Sikh expression referring to the Sikh duty of protecting and feeding the needy and oppressed; due to the long period of the Sikh Empire, this concept (and many other Sikh concepts) had effectively become secularized and spread to all quarters of Punjabi society; the people behind the new regime sought to spread it further.
On the side of the flag is a tricolour. Originally these colours were streamers tied to the flag, but they were later made fixed. These colours originally referred to the three largest faiths of Punjab: red, to Hinduism; yellow, to Sikhism; and green, to Islam. However, mere colours were chosen to represent these three faiths with the intention that they could be redefined; as such, many have claimed connections between these colours and more abstract principles; recently, the government has stated that red represents hard work, yellow represents wealth, and green represents Punjab's great farmlands.
The flag's usage is regulated by a section of the Civil Code. Originally, its use was restricted to the government, but this was later abolished; today it is very much a national symbol representing the nation, the Constitution, and the people.
[1] At least, that's what I hope it says.