It’s the first month of 2018 and discussions over annual budget have already started in the state’s legislative assembly. Compared to a budget size of Rs. 38068 crore in FY 2013-14, the budget presented by the state in the previous year was Rs. 79,472 crore, registering a growth rate of over 20 percent in last four financial years. If reports are to be believed, the Jammu and Kashmir Government is going to present a budget size of Rs 85,000 Crore for FY 2018-19.
Growing size of state budget remarks increase in the government spending on revenue expenditure and asset creation. Unless the growth in spending is backed by healthy source of financing like collections from direct and indirect taxes, share in central taxes and other non-tax sources; this borrowed growth might otherwise bury the exchequer under truckloads of debt. Fiscal gaps, which arise due to shortfall in receipts from these sources, are often filled by way of market borrowings, borrowing from public accounts like provident fund and majorly through central assistance. Being the easiest route of funding, successive government in the state have often resorted to market borrowings, creating a pile of debt resulting in recurring interest payments which eventually puts pressure on the already scarce revenues.
It was in this backdrop that J&K enacted Fiscal Responsibility and Budget Management (JKFRBM) Act in 2006, after FRBM was enacted by the central government in 2003. Among other responsibilities like fiscal prudence, fiscal sustainability and transparency, the act entrusts the state government to maintain its fiscal deficit at around 3 percent of its Gross State Domestic Product (GSDP). Unfortunately, all the successive regimens including the one in power have toyed with state’s fiscal health by prioritizing vote bank policies over fiscal responsibility and prudence. That’s why every year we read very concerning and sometimes taunting observations being made by the Comptroller and Auditor General of India (CAG) vis-à-vis the deteriorating debt profile of our state finances.
As per Reserve Bank of India’s annual report on statistics on Indian States, J&K’s fiscal deficit has grown by over 356 percent in last 4 years from Rs 2827 Crore to Rs 12892 Crore (Including Rs 3538 Crore UDAY bonds) with a staggering annual growth of 46 percent. The GSDP on the other hand has registered an average growth of around 7.23 percent in last 4 years. This unproportional growth between J&K’s fiscal deficit and GSDP has lead to a very unhealthy fiscal deficit-to-GSDP ratio of 8.81 percent (6.2 percent in case liability of UDAY power bonds is subtracted), one of the highest in India. The same stood at 5.65 percent last year. The estimate exceeds the 3 percent limit prescribed by the 14th Finance Commission by a huge margin.
The total debt profile comprising of internal and external debt has also been on a steady rise. CAG has also raised alarm bells quite frequently on this account. The Debt-to-GSDP ratio, which stood at 45.8 percent in 2015-16, is now hovering above 50 percent. Here again we rank No.1 in entire India. With a bigger budget in anticipation, this figure is expected to go even higher.
The problem with fiscal mismanagement is that it is not limited to just observations from CAG or finance commission, it actually crystallizes into recurring losses. For example, the coupon rate (yearly interest) that J&K has to pay on its bonds (state governments issue bonds in bond markets through auction for raising capital) is far higher compared to states with better fiscal balance and credibility. In fact, J&K’s bonds are the least liquid in market with few takers and the state has to offer a premium to investing institutions in order to raise the funds. In other words the cost of capital to fund our budget is a lot higher, the interest of which is hurting our state finances on a recurring basis.
With all these challenges, the volatility factor added by GST on account of income from indirect taxes is expected to witness some new lows. Factor to it the recurring financial impact of the 7th pay commission and the recent decision of regularizing 60,000 odd daily wagers. The task of matching supply with demand is going to be quite daunting. Given the fact that revenue and capital receipts have been growing linearly compared to expenditures which are growing exponentially, the debt profile of the state is not going to get any better. The previous three budgets of the present dispensation have spoken at length about the historic fiscal mess in our state finances. A plethora of reforms were also announced ranging from BEAMS to restructuring of PSU financing, but unfortunately the outcomes are not matching with the announcements. Hope the one in the offing is more pragmatic, fiscally responsible and financially achievable.
(Author works as an Investment & Foreign Exchange professional based in Mumbai)