Fiscal Challenges in J&K: A Pre-Budget Review

Arjimand Hussain Talib treads where few Kashmiri journalists have ventured so far

(Arjimand, 32, is from Srinagar and matriculated from Tyndale Biscoe Memorial School in 1991. He subsequently graduated with a Bachelor's degree in Engineering from Bangalore University. He is also an alumni of the International Academy for Leadership, Gummerbach, Germany. Arjimand writes regular weekly columns for the Greater Kashmir and The Kashmir Times since 2000 on diverse issues of political economy, development, environment and social change and has over 450 published articles to his credit. Arjimand is currently working as Project Manager for Action Aid International (India) in the Kashmir region and is a member of its International Emergencies and Conflict Team (IECT). His forthcoming books: " Kashmir: Towards a New Political Economy", and "Water: Spark for another Indo-Pak War?" are scheduled for release in 2008.)


SRINAGAR, Dec 21: It is always like a trade off between electoral populism and fiscal prudence. With the elections to the Jammu and Kashmir State Assembly just round the corner, this year the coalition government is faced with quite a few challenges with regard to the 2008-09 budget.

Would it go that extra mile, act more prudently and address the challenges of rising fiscal and revenue deficits, low internal revenue mobilisation and burgeoning debt? Most importantly, would it be able to give a longer term direction to the State for creating job opportunities for the huge mass of unemployed youth and also raise the much-needed internal revenue generation capacity? And would it be able to address the structural lacunae and fine tune the public delivery systems to ensure funds utilization as per the set time lines?

J&K is a classic case of a State with a relatively sound economy according to South Asian standards but with rather poor g o v e r n m e n t finances. Can it capture the opportunities in the economy to make the State finances achieve a respectable and sustainable revenue generation capacity?

The Comptroller and Auditor General (CAG) in its report for 2005-06 has raised some very disturbing trends in J&K’s financial management. It reported the State’s overall fiscal liabilities having increased from Rs 9224 crore in 2000-01 to Rs 16,801 crore in 2005- 06. It also reported the fiscal deficit to have risen from Rs. 1311 crore in 2002-03 to Rs. 2,643 crore in 2 0 0 5 - 0 6 . According to it, the State also had a serious primary deficit, which increased from Rs. 216 crore in 2002-03 to Rs. 1,528 crore in 2005-06. All these revelations have come up in the midst of the government claims that we are now having “zero deficit” budgets – something which the Opposition National Conference has also pooh poohed and something which the coalition government has not satisfactorily explained. The other aspect is the chronic use of overdraft by the government from J&K Bank and the State’s tax payers ending up paying hefty interest to the bank.

The 2005-06 CAG report indicated that there was no improvement in the management of cash balances, as overdraft facilities were used for all 365 days during 2005-06 rather than on discreet basis with the J&K Bank. And, as a result, the State’s interest payment on the overdraft has increased from Rs 71.57 crore in 2000-01 to Rs 138.42 crores during 2005-06. No wonder there was an outstanding balance of Rs 2047.44 crore at the close of the year.

Another dimension which is seldom talked about in the State’s budget statements is the growth rate of fiscal liabilities which was 18.33 per cent during 2005-06 over the previous year. The ratio of fiscal liabilities to Gross State Domestic Product (GSDP) also increased from 60.37 per cent in 2000-01 to 73.78 per cent in 2005-06. That means that the fiscal liabilities had grown faster than the State’s GSDP.

Given the fact that the basis of the GSDP calculations are far from accurate, given the concerns about our mechanism in quantifying certain economic activities in the State it is likely that the actual fiscal liabilities grew even faster than what the CAG has reported.

Over the years many of us have been saying that high reliance on unproductive borrowings, including loans from NABARD and the Asian Development Bank (ADB) – which the governments have been presenting to people as “heavenly grants” – would land J&K in a despicable situation.

CAG has already raised its concerns on that. It is common sense that the spiraling debt liabilities often result in a vicious cycle of deficit, debt and debt service payments, unless suitable measures are taken to arrest the persistent increase in fiscal liabilities. The premise that these loans would spur economic growth and hence enhance the State’s ability to re-pay loans has been based on faulty assumptions, more often guided by narrow populist considerations rather than sound economic logic. The huge backlog of NABARD loans, for instance, for making rural roads is a case in point.

As pointed out in the CAG report, public debt is considered sustainable as long as the rate of growth of income exceeds the interest rate or cost of public borrowings subject to the condition that the primary balance is either positive or zero. An analysis of the primary deficit vis-à-vis quantum spread clearly reveals that their sum turns out to be negative in each year of the period 2000-06 indicating rising debt-GSDP ratio and deteriorating situation of debt sustainability in the State. It is incredible that the State is yet to enact its own law which could put a limit to the borrowings.

There is another dimension to it: that is preference to creation of populist and decentralised political systems to sound fiscal management without relative accountability. How would the State address this problem in the budget? How would the government rein in the deficit on account of the power purchases?

Part II: Work culture 'deficit': Under-spending and cost over runs need attention

Srinagar, Dec 20: Political governance in a State like J&K has never been just all about securing financial allocations from the Centre. It has always been about the ability of the governance structures to spend funds in time and with quality. It is not that we have a problem of plenty. It is basically about the capacity of the State's delivery systems to do things in time and quality.

It is not only about the projects being executed in the State sector it is also but special projects and centrally sponsored schemes.

The Comptroller and Auditor General of India (CAG) has already highlighted this disturbing trend. According to it, there were 348 incomplete projects as of March 2006 in which Rs. 1, 716.58 crore were blocked. Besides, there was cost over run of Rs. 1,718.79 crore in these projects as the initial estimated cost of Rs. 2,319.28 crore was revised to Rs. 4,038.07 crore.

The way the Public Accounts Committee (PAC) of the State Legislature has been taking up follow up and action taken issues has always been far from satisfactory. There is no doubt that it is the legislature which in theory has to use its moral discretion to take up audit issues for correction and remedy. But we will have to acknowledge the fact that the credibility of J&K's democratic system has a long way to go before our legislature could do it with integrity.

When it comes to the special schemes the state of affairs is hardly different. During the last budget session, it was revealed that out of Rs 848 crore released under the PM's Reconstruction Package our State was able to utilise only Rs 484 crore during that year.

Out of the Rs 4100 crore released last year under ADB-funded projects and Bharat Nirman Yojana hardly 5 per cent of the funds had been spent.

The dismal state of spending and delayed delivery of public services has been exposed in a government document itself which was prepared to argue for time extension for the PM's Reconstruction Package. The ways we have failed to deliver makes interesting reading.
The Package which was scheduled for completion in 2007-08 has already been extended to 2009. J&K's planners are upbeat that the Rs 500 crore which were not released by the centre for State sector projects for 2006-07 until January 2007 would not lapse and they will be extended to next financial year. It has been revealed that many central projects under the Package which are to be implemented by State government agencies, either work is yet to be taken up or little progress has been made over them.

Under State sector projects, the PM's Package has Rs 3316.12 crore worth of projects, whose cost was subsequently revised upwards to Rs 3787.42 crore. Out of this only Rs 1215.36 crore had been spent till early this year.

As against a provision of Rs 1056 crore for transmission and distribution of electricity, only Rs 133 crore have been used until 2006. Out of Rs 142 crore kept for model villages only Rs 44.68 crore have been spent so far. For upgradation of nine women's ITIs only Rs 14.91 crore have been spent against the actual outlay of Rs 30.60 crore. Surprisingly, hardly Rs 17.77 crore have been spent against the sanctioned amount of Rs 49 crore for 14 new degree colleges, which were billed to help decongest the existing colleges and help provide quality education.

The dream of electrified villages and quality supply to others has remained unfulfilled despite a provision of Rs 700 crore as reportedly until now only tenders had been floated.

Out of Rs 83.62 crore sanctioned for National Rural Health Mission (NRHM), a mere Rs 8 crore have been used on civil works in Community Health Centres (CHCs) even as people in our State continue to die for want of basic health facilities.

Although promotion of tourism continues to remain the pet goal of the State's governments, nothing could be as ironic as the fact that our State had spent only Rs 1.64 crore out of Rs 31.50 crore approved for development of tourist villages until early 2007. Shamefully, only Rs 3.85 crore had been used for providing assistance to Tourism Development Authorities as against Rs 240 crore sanctioned under the Package.

Out of Rs 201 crore sanctioned for rehabilitation of horticulture and establishment of agri-clinics, a paltry Rs 25.44 crore had been spent. The document reveals that only Rs 1 crore was incurred on urban self employment as against Rs 26.94 crore reserved under the scheme during last year. As if all this was not enough work is yet to be launched on upgradation of Jammu and Srinagar Medical Colleges for which Rs 120 crore each were sanctioned.

The PM's package had also earmarked Rs 1741 crore for Greater Srinagar and Rs 1470 for Greater Jammu for drainage and sewerage. But the government had not spent anything until early 2007 despite the fact that Srinagar city has witnessed two floods due to lack of drainage facilities during the last one year alone.

In these state of affairs what is needed for J&K State is not only the traditional appropriation and regularity audits, the propriety audit and the efficiency-cum-performance audits need primacy. For that to happen we must have external audit and quality delivery appraisals and transparent system of ensuring actions are taken.

It also needs transparency and public information on the Action Taken Notes by various ministries so that people know about the outcomes.


Part III: Power budget puzzle: Taking on the myths and contradictions

Srinagar, Dec 23: Power economics in Jammu & Kashmir has always remained a kind of puzzle difficult to demystify. Post 90s, every government in the State has held the argument that if the deficit on account of power purchases could be curbed, the State could well achieve "financial self-sufficiency". The reasoning has been simple: we are not being able to raise as much revenue as we pay to purchase power. But is that the only reason?

One thing that a separate budget for power has done is that it has demystified many a myth about this power deficit. An analysis of the Power Budget 2007-08, apart from bringing to light its intrinsically paradoxical premises, also brings out quite a few conflicting conclusions.

As per the official figures, J&K purchased 6400.96 MUs of power from various Central Power Sector Undertakings (CPSUs) in 2003-04 while as in 2006-07 the purchase is expected to be around 7260.852 MUs. Purchase of power from the State-run Power Development Corporation (PDC) in 2003-04 was to the tune of 850.677 MUs, while as in 2006-07 it is expected to raise to 884.866 MUs. This simply shows, something not so novel, that our demand for purchases from both CPSUs and PDC are on a rise.

The cost per unit and the total purchase bill show almost the same trend: According to official figures, in 2003-04 total cost of purchase of power was Rs. 1071.778 crores while as in 2006-07 it is likely to be around Rs. 1838.00 crores. Then there are the costs of "Other Expenditure" as detailed in the Power Budget 2007-08 which are expected to be Rs 188.14 crore. Let us also note that the rate/unit (in Rs/KWH) has also been steadily increasing: in 2003-04 it was Rs 2.001 while in 2007-08 it has risen to Rs 2.256.

It is obvious that J&K's power demand would continue to grow steeply given the rise in consumption and upward social and economic mobility. But how would J&K meet this demand?

A section of strategic analysts in New Delhi have of late maintained that in case India and the United States could make their nuclear energy co-operation agreement successful there were good chances that the centre would heed the recommendations of the Rangarajan Committee and, at least, hand over the Dulhasti Power Project to J&K State.

Now that the Indo-US nuclear agreement stands in jeopardy India's energy needs, mostly in its north are clearly linked to the hydro-power potential in J&K State. Under such circumstances can any J&K government successfully negotiate transfer of the Dulhasti or Salal Power Project to it?

The problem is that under such circumstances J&K's financial condition would continue to remain precarious given its inability to quantify its energy losses in a political economy where it is not just the State and civil society but also armed forces/police who constitute a significant portion of the energy consumption grid.

As far as revenue/receipts from power are concerned they are rising too, albeit with huge mass of deficit. In 2003-04, our revenue from power was Rs 393.05 crores while as in 2006-07 it is expected to be Rs. 711.64 crores. While the deficit on account of power was Rs. 847.02 crores in 2003-04, the deficit this year is likely to be Rs. 1314.50 crores.

But the point is why the mass of deficit in percentage terms has remained almost the same over the years? There are many questions that are rising again and again and which need to be addressed.

Let us take the issue of revenue generation from power being directly linked to installation of electronic power meters in the State. It is on several occasions that government ministers and officials have said that once all our consumption centres are metered and people pay power fee, J&K's power woes would be history. But is that so?

As per the 2001 Census, there are a total of 15,68,519 households in our State, out of which 7,95,100 are in Kashmir division while as 7,73,419 are in the Jammu division. According to the figures given in the 2006-07 Power Budget, it is revealed that in the year 2005-06 there were 10,14,745 registered power connections in the State which are expected to rise to 10,51,745 by the end of this financial year due to the addition of another 37000 registered connections. This means that about 67 per cent of all the households are having a registered power connection.

As per the figures made available by the PDC, a total of 10,66,181 electronic meters shall be in place by the end of this financial year in the State, out of which 5,33,803 are installed in Kashmir division while 5,32,378 are installed in the Jammu division. This means that about 68 per cent of our total households are electronically metered as well.

It is possible that there are other commercial entities which have not been mentioned in the Power Budget. But it is obvious that their number is not a significant one.

Now the point is that if about 67 per cent of our connections are registered and one would assume that they are paying for power then why are our power losses and transmission and distribution (T&D) losses so high? Are the gigantic numbers of government and military/para military establishments included in this analysis?

The percentage difference makes it clear that there are some other factors as well which are not reflected in the State's budget analysis.

Part IV: Mobilising internal revenue - What are the choices by the way?

SRINAGAR, Dec 26: It is not about rocket science but basic economics in budget making: J&K has to take some extraordinary steps, including going back to the Article 370 and the powers of tax devolution, to raise enough revenue internally to arrest the fiscal deficit, debt and other fiscal liabilities. The problem is that J&K government under the present circumstances has very little choices to raise revenue internally. Let us see how.

There are no such economic activities in the State currently which could be taxed and revenue increased. If at all there are a few activities, primarily in primary sector, government would not like to tax them given the populist compulsions. Then if there is an increase in economic activities in the services sector, the revenue from there would go to the central kitty and in the absence of clarity on J&K's tax share formula and its role in taxing services after the Indian Constitution (Eightieth Amendment) Act, 2000 optimism in that remains elusive.

During the current year revenue receipts as per government's initial estimates would be Rs 12666 crore, which would be all those receipts, which do not incur repayment liability. But there is every possibility that this figure would be revised downwards. This figure also includes grants from the central government for the financing of State Plans as well as non-plan grants, in addition to the State's own tax and non tax revenues.

In comparison, the revenue expenditure, the State's routine administrative expenditure, such as wages and salaries, expenditure on maintenance and repairs and other overheads like payment of taxes, interest, insurance premia etc. is likely to be around Rs. 9774 crore. Going by this optimism there is a revenue surplus of Rs. 2892 crore this year.

But the source of worry is our capital receipts, which include loans raised by the State from the market, borrowings from RBI and other institutions, loans from the Centre and the State's recovery of its own loans, which have been pegged at Rs. 1770 crore for this year.

The capital expenditure, which constitutes spending on capital assets like roads, power projects, water supply schemes, buildings etc. during this financial year are likely to be Rs. 4662 crore. This also includes disbursements which are on account of repayment of State's public debt and the loans and advances made by the State to the various entities.This would put our capital account deficit at a whopping Rs. 2892 crore. And the budgetary deficit is not small too. The budgetary deficit, which represents the State's total expenditure minus the total receipts, is large too but since the State Governments in India have no access to the monetisation route and as such budgetary deficit in J&K's case also ought to be zero.

When it comes to the fiscal deficit it is likely to be Rs. 1337 crore this year, which in any case is not small.

The fact is that the increase in the revenue receipts by 16.34 per cent during 2005-06 has been mainly on account of central transfers comprising grants-in-aid from the centre. But the overall fiscal liabilities of the state increased from Rs 9224 crore in 2000-01 to Rs 16,801 crore in 2005-06. The fiscal deficit increased from Rs 1311 crore in 2002-03 to Rs 2643 crore in 2005-06. The primary deficit during the same period increased from Rs 216 crore to Rs 1528 crore.

The overall fiscal position of the state as reflected in terms of key parameters revenue, fiscal and primary deficits, indicates deteriorating fiscal situation during 2005-06 over the previous year.

In its annual report last year the CAG has pointed out that the J&K continues to be dependent on borrowings for plan or development expenditure and has also criticised the way in which government departments were utilising the money. It has also already asked the J&K government to "take immediate steps to improve the buoyancies in resources because of the deterioration in its overall fiscal position." But does it have that room? The fact is that the capital and revenue expenditures have increased by 38.5 per cent and 19.5 per cent during the year but revenue receipts and non-debt receipts could not keep pace with the increase in expenditure of the state.

Questioning the government claims of zero deficit budgets, the CAG has summed it all up: "The cardinal indicators of debt such as quantum spread together with primary deficit being perennially negative, increasing ratio of fiscal liabilities to GSDP with a growing fiscal deficit and the higher buoyancy of the debt with regard to its revenue receipts indicates unsustainable debt situation of the state in the medium to long run."