Fallout on finance

The first budget for theUnion Territory of J&K presented by Finance Minister, Nirmala Sitharamanreflects the existential crisis that Jammu and Kashmir is currently in.Constitutionally, J&K is a Union Territory with legislature. The reality onground is that there is no legislature. So, for now, it is a Union Territorywithout legislature.

The unprecedented downgradingfrom a state to a Union Territory has, of course, major implications onJ&K’s fiscal federal relations with the Union government. Preoccupied aseveryone has been with the political fallout, the financial consequences havenot been even pointed out yet let alone discussed and contested.

   

The Budget presented to theParliament on the 17th of March, 2020 is not a Budget of J&K, it is budget forJ&K.  The budget is not onlyblasphemous to the tenets of fiscal federalism, it violates basic budgetaryarithmetic and analytics.

Sample this. On page 5 of theBudget at a Glance, Table 3, “Total Grants from Centre” includes, Rs 15,200crores as “Share in Central Taxes”! Anyone with a nodding knowledge of centrestate fiscal relations will know that the share of centre taxes is aconstitutional right under Article 270 and not a grant. Similarly, on page 9,Table 7, “Statutory Flows from Centre” includes PM Reconstruction plan, PMIP,CSS and grant for allowances. All these are not statutory but discretionarygrants.

There is more to this thanwrong classification. J&K as a Union Territory is not entitled to a sharein the central taxes. In fact, no resource transfer after August 5th 2019 fromthe centre to J&K is statutory.

The Constitution (EightiethAmendment) Act, 2000 amended Articles 269, 270 and 272 to specifically excludeUnion Territories from getting a share in the net proceeds of Centre’s indirecttaxes.  Far from sharing, this Actincludes the net proceeds of indirect taxes from Union Territories as a part ofthe consolidated fund of India. As a result, in addition to the administrativecontrol, in fiscal matters, Union Territories are subsumed into the Centre. Thefinancial allocations and requirements of Union Territories are clubbed alongwith the demand for grants of the Home Ministry.

So at is stands now, theConstitution doesn’t allow the Centre to share its taxes with J&K. Therights of J&K have now become the requirements of centre! As such, thefirst major implication of the August 5 actions is that the devolution, whichwas statutory right of J&K, is now a discretion of the Centre. It is nolonger an entitlement.

In the Union budget speech,the Finance Minister announced that Rs 30,757 crore has been “provided to theUnion Territory of Jammu and Kashmir for the Financial Year 2020-21”. What wasearlier the share of the J&K in central taxes is now, technically speaking,a budgetary provision in the Union Budget, a part of Home Ministries demands.

To be fair, she has topped itup marginally. The share of J&K as a state was 0.85 per cent of the net taxrevenues of the Centre in lieu of 1 per cent has been allocated. As a state,J&K (including Ladakh) would have got around Rs 31,200 crore. Now the UnionTerritory of J&K and the Union Territory of Ladakh now get Rs 36,715 crore;an additional amount of Rs 5,500 crores. A rough and ready way to look at it isthat centre has absorbed the additionality arising out of making Ladakh a UnionTerritory.

In view of this, the majorfaux pau of providing “share of taxes” for J&K in a budget documentpresented to the Parliament is unprecedented. . It is making a mockery of theentire system of fiscal transfers.

Such conceptual confusion,presentational ineptitude and gross misclassifications not only mar theintegrity of the budget document but also have serious legislative andadministrative implications. If these monies or resource transfers are indeedstatutory or entitled, then the J&K Budget runs contrary to Jammu andKashmir the Reorganisation Act, 2019 and is in violation of the Constitution ofIndia as amended on August 5th, 2019.

As regards the budgetaryarithmetic, at first sight, the revenue budget looks realistic; at least as faras the estimated own revenues, tax and non-tax, are concerned. In 2020-21, theown revenues are estimated to be decline from Rs 18,998 crore to Rs 17,306crore 2019-20. That there should be no increase in revenues despite an estimatedto SDP growth of 11 per cent is curious.

But a deeper examinationreveals that over and above the own tax revenues of Rs 13,241, the budget hasestimated Rs 4,000 crore as additional resource mobilisation. This is an absurdnumber, which must surely be a first in the fiscal history of J&K! This iswithout doubt a piece of fiction written by somebody who has a penchant forwriting horror stories.

What it means is that J&Kwill add one third of its existing revenues to its kitty in the course of oneyear! Even the cumulative ARM of last decade or more would not add up to Rs4,000 crore. Mind you, the ARM is not only over and above the normal buoyancyof revenues, it comes at the back of Rs 1,000 crore ARM that is planned fromOctober 2019 to March 2020. With two days left for the financial year, there isyet no ARM measures announced by the J&K administration!

Given the estimated growth of11 per cent growth in SDP, the elasticity of ARM is estimated to be 2.75. Thelatest estimate of tax elasticity of indirect taxes in India is 0.90! This isbetter than any economy anywhere in the world. This defies all logic.

Apart from these magnitudes,this kind of taxation policy which prefers new tax rates and incidences defiesall tenets and wisdom of public finance even in a steady state economy not totalk of an economy in the throes of a crisis.

There is not a singleresource mobilisation measure that has been announced in the Budget. Nor hasany break-up of the Rs 4,000 crore ARM provided. Theoretically, there are onlythree ways in which ARM can happen; news taxes, a change in the rate and baseof existing taxes or hiking the user charges. The question is what new taxes isthe UT administration going to levy? More importantly, what taxes can the UTgovernment levy? What rates can they change? Incidentally, with the abolitionof the toll post at Lakhanpur, an oft exploited source for ARM in the past hasalso been given up recently.

On the expenditure side, thebudget is delusionary. It bears no relation to the ground reality. The Budgetestimates that Rs 14,885 crore will be spend on capital account betweenOctober, 2019 and March 31st, 2020. Setting aside debt repayment of Rs 1,000crore, how will the remaining Rs 14,000 crore be spend?

It is a well-known fromAugust, 2019 to January 2019, the state, in particular the valley, was under acomplete lockdown. There was no developmental work taking place. Realisticallyspeaking, this amounts to spending Rs 5,000 crore per month which is about 165crore on every working day! The system doesn’t have the absorptive capacity forthis. Even if did, the pandemic will make it absolutely impossible to do anycapital works. The March madness at treasuries must have taken over by now!

To sum up, the first budgetof the UT of J&K is conceptually flawed, technically amateurish andoperationally impractical. It needs to be withdrawn as it misleads the Houseand is in breach of parliamentary privilege.

Tail piece:

If the UT administration ofJ&K is serious about meeting its budgeted ARM of Rs 4,000 crore, they maywant to take a leaf from the fiscal history of Kashmir. Pandit Kalhana recordsin the Rajatarangni that King Harsha who ruled Kashmir from 1089 – 1111 CE,levied a “special tax on night soil”. To make sure that it was collected a “prefectof night soil” was duly appointed. This will surely kill two birds with onestone; revenue target will be met and employment will begenerated!

Leave a Reply

Your email address will not be published. Required fields are marked *

thirteen − 13 =