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Jammu & Kashmir finance minister Abdul Rahim Rather presents the annual budget 2014-15 in the Assembly, in Jammu, India, on Thursday. Photo: Nitin Kanotra/Hindustan TImes
Jammu & Kashmir finance minister Abdul Rahim Rather presents the annual budget 2014-15 in the Assembly, in Jammu, India, on Thursday. Photo: Nitin Kanotra/Hindustan TImes

The fiscal mess in Jammu & Kashmir

It is perhaps the first time a budget borrows only to finance current expenditure and defray past liabilities

The state budget of Jammu and Kashmir (J&K) for 2014-15, presented last week by the National Conference-Congress government, has set new standards in budgetary impropriety.
In view of the Union budget being a vote on account this year, the level of the gross budgetary support to the annual plan has not been decided. Accordingly, the Planning Commission has circulated guidelines for state plan projections.

The guideline asks all states to budget the state plan on the basis of 5% increase in normal central assistance, the special plan assistance and the special central assistance. All other central plan transfers are to be kept at the current fiscal year’s level.

Notwithstanding this clear directive, J&K government has gone ahead and presented what can be best described as a hip-shooter’s budget.

For example, in the current fiscal year of 2013-14, the special central assistance provided to J&K was 3,441 crore. Instead of projecting it at 3,613 crore for 2014-15, the state budget estimates it to be 9,997 crore. This is a growth of 190%, whereas it should have been 5%.

If the Planning Commission’s guidelines were to be followed for all central plan transfers (including centrally sponsored schemes), the total central grants to the state should have been estimated at around 16,000 crore. Instead, these have been estimated at least to be 22,973 crore. This is an overestimation of nearly 7,000 crore. For a state whose plan in the current fiscal year is just 7,300 crore, this difference changes the entire budgetary arithmetic.

For instance, the non-plan revenue deficit is estimated at 9,525 crore. The plan revenue account surplus, boosted by the central grants, is estimated to be 15,800 crore. This leaves an aggregate revenue account surplus of 6,273 crore for funding the capital expenditure. This, along with an estimated capital receipts of 4,282 crore, finances the total capital expenditure of 10,600 crore. Of which, 8,500 crore is estimated to be the plan capital expenditure.

However, adjusting for the violation of Planning Commission norms, the budgeted surplus on revenue account actually becomes a deficit of 700-odd crore.

As a result, out of the estimated capital receipts of 4,282 crore, 700 crore of borrowing will go to finance the revenue deficit. This leaves the state with 3,600 crore of borrowings to finance its total capital expenditure.

Of this, 2,090 crore is non-plan capital expenditure, which is fixed as it has to go towards repayment of debt. So what really is left for the capital plan or developmental capital expenditure is a measly 600 crore and not 8,500 crore as estimated in the budget.

This is so in spite of the fact that the budget estimates the state plan to increase from 7,300 crore to 11,300 crore. Indeed, the increase in the plan expenditure from 7,900 crore to 11,900 crore (including 600 crore of the Prime Minister’s Reconstruction Plan) is contestable. Never has any state got an increase of over 50% in one year.

To make the increase absurd, for the last two years there has been a zero percent increase in the plan.

This is perhaps the first budget in the country, which, for all practical purposes, borrowed money only to pay for revenue expenditure or defray past liabilities. There is no state plan in the budget as it is meant to be.

Going beyond the arithmetic, three issues need to be highlighted. First, such an outlandish budget brings into disrepute the entire budgetary process and makes a mockery of the document that has huge public policy implications.

Second, and more importantly, it is tantamount to misleading the legislature. It seriously compromises the sanctity of the House.

Third, in a sensitive and volatile state such as J&K, this easily escalates into a political issue. The moment the Planning Commission resizes the plan, which it is bound to, from 11,900 crore to a technocratically realistic level of 8,700 crore, all hell will break loose about discrimination against J&K. By then, the budget and its illegitimate numbers will have long been forgotten and the debate will get into completely irrelevant terrain.

As if these budgetary blunders were not enough, the state government has gone into an overdrive of giving off-budget sops in the run-up to the parliamentary and assembly elections later in the year.

For instance, in a fortnight the state government announced creation of more than 3,000 new administrative units in the revenue administration setup. Not only does this bureaucratic decentralization subvert the democratic decentralization of panchayats, it sets back the government by anywhere between 1,500 to 2,000 crore. The new government, whichever it may be, will be left carrying the can.

Given this situation, it is important from an institutional perspective that some mechanism must be provided to rein in such action. Perhaps the Fiscal Responsibility and Budgetary Management Act should be modified to stipulate an acceptable band of deviation between budget estimates, revised estimates and actuals.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice.

To read Haseeb A. Drabu’s earlier columns, go to www.livemint.com/methodandmanner-

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