J&K Budget 2010-11

First published in daily Greater Kashmir, Feb 28, 2010

Omar’s new road
Would Budget 2010-11 go beyond populism?

By: Arjimand Hussain Talib

J&K state stands at a crucial juncture of its history. Its political economy today plays a critical role in shaping its politics. And even security.

The state’s budget for 2010-11 has to make a choice: either to take the beaten track or chart a new destiny based on self reliance and dignity. But would this government opt for the latter? Would it risk short–term public unpopularity for the sake of longer-term stability and well being of the state?

Chief Minister, Omar Abdullah, in his speech in the Assembly on Thursday hinted at days of tough love ahead. In a long-overdue confession, he said he finds it uncomfortable going to India’s Planning Commission with a begging bowl every time. In other words, the upcoming state budget may introduce new taxes in the state, which could even go beyond political populism.

We have been saying this in this column since long that there is no substitute to introducing greater and newer taxes in the state. At an individual level, greater taxes are bound to hurt us, but at a collective level we will be surely better off. There is absolutely no alternative. However, the government must bear in mind that a mere introduction of a tougher and wider tax regime is not going to help; we need to reform our governance systems as well. There are too many loopholes under the current governance system that hinders a uniform and robust tax regime.
A greater and wider tax regime is fundamentally required to create newer jobs. It is a foregone conclusion that the employment scheme announced in December last year is a flop.

The government of India’s announcement of 2000 jobs for the state’s youth in paramilitary forces is a cynical move; rather than stabilising and making our youth productive, it is likely to fuel social animosity, militarization and instability. This move goes to reinforce the misgivings about New Delhi’s thinking process on this state.

Looking from a macro perspective, J&K state today looks akin to those African states which survive by foreign aid. For years, poverty eradication and economic growth strategies in such countries have failed to deliver for many reasons. The most striking reasons being donor dictates, lack of political sovereignty, unjust international trade regimes, poor taxation systems, abysmal governance and acute corruption. Same is the case with us.

Zambian economist, Dambisa Moyo’s path-breaking book ‘Dead Aid’ has some unmistakable lessons – especially why the ‘aid model’ has actually failed, and what havoc aid dependency was wrecking with most of the African countries. Given J&K’s case of aggravating aid dependency and poor tax revenues, our case also needs to be looked from the same prism.

As the government is finalising the state’s budget for 2010-11, a focus on the macro picture is long overdue. That macro picture would help us analyse where the state is headed. Excessive focus on the micro aspects of the budget exercise would, at best, address the populism constituency. We require a political will to look at the policy part of it – from a macro perspective.

J&K state is at a highly critical juncture today. The level of dependency on the Government of India (GoI) aid – in our case ‘grants’ – is reaching a critically high level. In Budget 2009-2010, the GoI grants constituted 59 per cent of the state’s total annual income. Salaries, pension liabilities, interest payments and the power bill alone constitute 53 per cent of our expenditure. Capital expenditure in 2009-10 was a mere 34 per cent.

In 2002-03, the overdraft from the Jammu and Kashmir Bank (the state’s official banker) was Rs 814 crore as against the maximum permissible limit set by the Reserve Bank of India of Rs 950 crore. Today, the government has a whopping overdraft of Rs 2,200 crore to deal with, which Omar Abdullah himself on Thursday referred to a gigantic challenge. Then there are other systemic problems, as acknowledged by the Finance Minister himself, related to delayed payment of salaries to government employees and the delayed clearance of bills in the government treasury.

The government on Thursday made it clear to its employees that it doesn’t have the money to pay for the arrears of the Sixth Pay Commission salary revision. That much is fine, but we must bear in mind that post-union budget 2010-11, inflation is going to aggravate further. That is going to hit the employees’ purchasing power even further.

The state’s debt to GSDP ratio also requires some imaginative thinking. J&K's overall fiscal liabilities are constantly increasing. Fiscal and primary deficits are also burgeoning. The growth rate of fiscal liabilities was 18.33 per cent during 2005-06 over the previous year. The ratio of fiscal liabilities to 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. The state’s spiralling debt liabilities have become a sort of a vicious cycle of deficit, debt and debt service payments.

There is a constituency that believes that since J&K’s GSDP and the per capita incomes are relatively better, the state can ward off any public finance crisis. That is only partly right. We must bear in mind that in J&K’s case a relatively better GSDP does not necessarily mean corresponding buoyancy in the state’s tax revenues. Our taxation system has too many loopholes. Imperatives of ‘public order’ and ‘peace through populism’ would continue to remain paramount as long as the larger political conflict remains unaddressed.

The crisis of our power sector is acute and beyond the band aids of any budget exercise. Our power sector losses are now at staggering Rs 2500 crores per annum. The revenue deficit in the sector is again likely to make the state’s budget go haywire. It is again a political issue, which requires a political solution. And it remains to be seen whether Mr. Omar Abdullah can go beyond the usual band aids or not.

The columnist can be reached at Arjimand@greaterkashmir.com. His book ‘Omar Abdullah: The Burdens of Inheritance’ is due for release in the coming months.