J&K Budget 2018-19: Selectively populist and fiscally entangled

From fiscal sovereignty point of view, this budget was a bit different from all the previous ones.

Ejaz Ayoub
Srinagar, Publish Date: Jan 15 2018 11:36PM | Updated Date: Jan 15 2018 11:36PM
J&K Budget 2018-19: Selectively populist and fiscally entangledRepresentational Pic

On January 11, J&K Government presented a Rs 80,313 crore annual budget for the financial year 2018-19. Starting on a ‘positive note’, the government embarked upon the improvements in fiscal deficit by around 400 basis points from an anticipated 9.5 percent to around 5.7 percent. The government also spoke about the budget surplus of Rs 1300 crore, which was otherwise anticipated as a deficit of Rs 3,137 crore. As a knee-jerk reaction, opposition termed the budget “trickery of numbers” which lacks focus on the unemployed youth of the state. Reactionary rather than a responsive value-adding approach by the opposition, led to almost no meaningful discussion on this essential annual policy document in the state’s assembly.

From fiscal sovereignty point of view, this budget was a bit different from all the previous ones. Unlike previous budgets where the state’s finance minister would decide on taxes and the government spending, this year the state budget had to limit its role to spending only. The right to manoeuvre with indirect taxes stands surrendered to Goods and Services Tax (GST) Council when the state adopted the GST in July 2017.

Growing Debt

When we talk of spending, J&K has a very little headroom because of the fact that our total revenue base hovers around Rs 30,000 crore only (tax + non-tax + share in central taxes) i.e. roughly 33 percent of the total projected expenditure. This year, state’s own revenue base has been better because of the GST compensation (Rs 7061 cr) from the central government on account of transitional provisions and increased share in central tax pool (based on 14th finance commission recommendations). The same (GST compensation) is expected to witness a contraction in coming years. Rest of the amount that is a whopping Rs 50,000 crore or 67 percent of the budget is being financed by way of loans, market borrowings and central grants.  As a result of a small tax base, the dependence on debt and market borrowings has created an unsolvable fiscal quagmire. The debt profile of the state has gone from bad to worse with a total cumulative liability of over Rs 62,000 crore, which stood at approximately Rs 55,000 crore a year before registering a jump of over Rs 7,000 crore in a single financial year. The quantum of debt can be expressed by the fact that every newborn baby in J&K inherits an individual debt of Rs 50,000 approximately. With a population of around 1.25 crore, we are among the most indebted state's in South Asia (compared to population size).

The Fiscal inequation

The yearly fiscal deficit when expressed as the percentage of J&K’s GSDP has shown an improvement, which stands at 5.7 percent for FY 2017-18. Being a ratio, this percentage is dependent on two variables, i.e GSDP (denominator) and Fiscal Deficit (numerator). The ratio gets reduced either by increasing the GSDP or reducing the fiscal deficit or both. The improvement in our case is not because of the improvement in our fiscal numbers, instead, it’s the growth in J&K’s GSDP which has resulted in the improvement of this ratio. In absolute terms, the estimation of the deficit has actually increased from Rs 8,061 crore in FY 2017-18 to Rs 9,673 crore projected for FY 2018-19. Given the fact that an entire sector including, trade, transport, hotels and restaurants, which contributes 7 percent to 8 percent to state gross domestic product, was down and out during the last financial year, the growth in J&K’s GSDP at 8.49 percent mentioned in the state’s Economic Survey sounds a bit contradicting.

Budget Surplus

Moreover, the surplus of Rs 1319 crore against the anticipated budget deficit of Rs 3137 crore for FY 2017-18 is a remarkable feat, given the fact that cost run and time run projects in our state has been a norm. However, this valuable saving of Rs 4,456 crore is a result of less spending rather than additional income. Both revenue and capital receipts have actually fallen short by around Rs 5,288 crore. Although savings of Rs 4937 crore in revenue expenditure deserve applause, however, the much-needed capital expenditure has also witnessed an unspent amount of Rs 4,807 crore.

The Budget Termites

After going through the historic details of this enormous debt raised by the state, the immediate question that comes to one’s mind is where is this money being deployed? The question starts pinching even more when one sees a chronic status quo in state’s overall infrastructural development. The ground reality is that agriculture continues to shrink, power woes continue to haunt, traffic scenario continues to deteriorate, the subsidized ration is being gradually reduced and free health care and quality education is still a distant dream. The only thing that seems to be growing is J&K’s budget size and state’s overall debt.

The idea behind allowing the deficit, if any, should be used to finance capital expenditure that leads to asset formation and not on revenue expenditure, the benefits of which do not go beyond that particular year. Unfortunately, a majority of our liabilities have been raised to feed our revenue expenditure, which predominantly comprises of salary and pension bill. To be specific it is around Rs 29,000 crore or 36 percent of our total budget. To make matters worse, the government continues to add more people to its saturatedly bloated employee base, just because it is deliciously populist and electorally lucrative.

Fiscal Responsibility Vs Power Temptations

This piled up debt is a result of mismatches in our receipts and expenditures left unaddressed over a period of time. Successive governments in the past have resorted to borrowings unabatedly resulting in accumulation of such a huge amount. There is very little that the present finance minister can do about it. Within such a tight space where you have to service an inherited debt, creating assets is an extremely challenging task. The problem is that whenever the government thinks of tapering expenses, the fear of vote bank erosion raises some pretty good questions. The government instead ends up succumbing to power thirst rather than sticking to its fiscal responsibility. Staying to the tradition, the surrender to electoral equations in this year’s budget is quite vivid as the budget has all the hues of a typical populist budget aimed at targeting electorally powerful sections of the society.

In politics, we have mastered the art of ‘passing the buck’ and in finances, we have started excelling in the art of ‘passing the debt’.

Author works as an Investment & Foreign Exchange professional based in Mumbai