The budget business

As the state legislature is debating the grants of the individual ministries, Kashmir Life offers basics of the budget 2012-13 and the subsequent high-voltage debate with its highs and lows.

Hours after Abdul Rahim Rather, state’s finance minster, presented his twelfth budget to the state legislature early this month, there was nobody to clean the two first level rooms of the Jammu civil secretariat that were littered with torn paper, food, throw away plates. “I am here but where are the people who will clean these rooms,” said one of the low rung officials of the finance ministry. “Everybody was awake for the whole night, working for more than 24 hours – writing, discarding, correcting and translating and they need time to manage their sleep debt.”

But that is just routine with the budget making exercise. It was more secretive earlier when states were enjoying some autonomy in deciding their expenditure priorities on the parts of funds that would come from the central kitty. But things have changed. After the Finance Commission paved way for the Planning Commission and the ministries eventually devised the central sponsored schemes, most of the money that comes from the federal pool is tied to particular schemes. And it is the Achilles Heel for most of the state finance ministers who want autonomy in deciding expenditure. Some states, including J&K, openly seek roll back of certain schemes like the Mid Day Meal but nobody is willing to even consider this in Delhi.

This has reduced the authority of the state finance ministries and just allowed them to fiddle with the resources that they raise from the states, which is limited to a set of taxes. Since the VAT is an all-India issue, the state finance ministries have created slabs for different items and brought some of the items under zero-VAT regime. This has further reduced the chances of interventions by states because the entire game is aimed at creating a single market across India.

This is exactly what Rather did this year. He jacked up excise on liquor – because it is the only item that offers a huge amount, and tobacco, partly on toll and apparently balanced it by reducing levies on a number of items linked with agriculture.

But the budget proposals offer a definite and final estimation of the resources a state can mobilize and absorb – the rise and fall of resource requirement in different fields of the routine governance. So the total requirement of J&K for 2012-13 is estimated at Rs 33853 crore.

Of this huge corpus nearly 48 percent would go to the employees on the rolls of government by way of wages and pensions. Only 26% of this expenditure would go into productive expenditure – the capital side. Resource outgo on the interest payments is eight percent of the total expenditure as purchase on energy and ‘others’ will devour nine percent each. Balance two percent goes to the special security related requirements of the state that excludes the routine police budget.

Managing so much of resources is the real tough task of any finance minister. While 53% of this comprises of the central grants and 13% is the state’s share from the central tax pool, J&K’s own tax base will contribute 16% to the requirements and the non-tax another six percent. Balance 12% will be managed by borrowings.

“I am not the finance minister of a resource rich state,” Rather told reporters after presenting the budget. “But you must appreciate that we have the highest growth in tax collections in India.” J&K collected record taxes of Rs 4800 crore which is a jump of 43.10% in tax growth over last year. “No other state in India had such a growth in a single year,” Rather pointed out. He foresees a net collection of Rs 5419 crore in 2012-13. It is Chattisgarh that is playing second fiddle with 38% increase.

The tax collections are phenomenal. But as a middle rung officer in a tax department pointed out: “We have made the collection system more efficient and there is lot of scope to tighten it further. But it all depends on how much the state consumes and how fast do consumers grow?”

Opposition reaction to the budget was scathing. Muzaffar Hussain Beig, state’s former Deputy Chief Minister who described his takeover as finance minister in 2002 as a situation in which “we are living in a financial sin” dwelled more on the economy rather than the budget. He talked about overall debt and state’s failure in swapping high cost debts with the low cost borrowings from the open market, a process that was initiated during Beig’s tenure. Evaluating the documents placed before the house, Beig genuinely talked about the awaiting debt trap that would hurt the credibility of the state in immediate future.

“Our debts will be 125 per cent of total economy (in a few years),” Beig said in a press conference. “The Finance Commission has made it clear that if the debts were not brought to 49 per cent, no money would be given to the State in the next award.” With debts and liabilities mounting – Rs 50673 crore by the end of 2014-15, he said, it was common sense that fiscal deficit would surge. Accusing Rather of misleading the lawmakers by talking about targets and not offering a roadmap, Beig said the finance minister is just managing his stint in the ministry.

Debts are vital part of public finances, almost everywhere. Debts as percentage to the overall spending in J&K are managed at sub-20% level. It started during the last year of the previous government when the debt ratio to the overall expenditure was managed by packing revenue expenditures from the plan side to the overall revenue account that brought the debt ratio to around 17.11% in 2008-09. Rather’s debts were at 13.03% in 2010-11 that surged to 17.75% in 2011-12 and he has estimated the debts to be around 11.53% for the fiscal 2012-13.

Rather has termed the overdraft of the J&K Bank a structural deficit. Finally he accepted the RBI ways and means and managed it during the 2011-12. His major promise was that he would save a substantial sum on debt servicing after the OD is managed. But the debt servicing has not been showing any improvement. The interest payments were Rs 2139 crore in 2009-10, Rs 2283 crore in 2010-11, Rs 2518 crore in 2011-12 and Rather expects them to be at Rs 2663 crore in 2012-13. He told the lawmakers that by Rs 1000 crore one time grant and Rs 1300 crore open market barrowing at 8.5%, state government saved Rs 229 crore in one year. He insisted that overall debt outstanding is at 54% of the GSDP which is permissible within the 13th Finance Commission’s set limitations. The fiscal deficit, he said, is at 4.2% which is satisfying because 13th FC had set a target of 5.3% for the state.

But Rather deserves credit for appreciating J&K bank. The only listed company was patted for paying the highest dividend to the state government that holds more than half of the total equity of the company. But the bank deserved credit for something else. The bank has throughout being accused of being a parasite on the state government and making its profits by lending to the government. This year when the government moved its systems to the RBI and did not lift any loan from the J&K bank, the company still made money and good profits. The bank should have been given credit for that and it was a well deserved acknowledgement.

Rather did undo the predecessor coalition’s system of offering power separate from the overall finances of the state. But it did not lessen the disastrous impact that power sector has on public finances. Finance Minister informed the state legislature that net power purchased and earnings out of sales continue to have the same mismatch as it had earlier.

“The electricity purchase bill for current year was expected to be around Rs 3000 crore while it is estimated to be at Rs 3100 crore next year,” Rather told the house in his 100-minute reply. “But we expect around Rs 1100 crore to Rs 1200 crore worth collections so the net losses is around Rs 1800 crore to Rs 1900 crore.” Now the government will be investing part of the central power devolutions to the energy auditing. It is great idea and it will take its own time.

Despite all these constraints, Rather did manage some concessions. His ‘peace dividend’ was the major initiative of his proposals. Banking on impressive tourist arrivals to Ladakh, Jammu and Kashmir (crossing 12 millions in a year) and terming the trend as “consolidation of peace and order,” Rather said the numbers signify the “growing confidence of the visitors in the persistent efforts and capability of the government in restoring peace and order”. In order to help industry invest in the additional infrastructure, Rather announced a slew of concessions to the ‘tourism units’ that includes every activity from hotels to recreation facilities.

It includes Capital Outright Investment Subsidy of 30% on fixed assets for new investments to the tune of three million rupees which could be increased to one crore rupees in case of prestigious units (Rs 25 crore investment). It will be extended to the substantial (not less than one third) expansion in bed capacity as well. They will be funded fully for the DPRs, expenses on their stamp duty on mortgages will be remitted to the extent of Rs 60,000 and insurance premiums subsidized by 60% and purchasing diesel generations by 75%. For houses accommodating paying guests, the government will offer 40% capital subsidy and for equipment related to tourism including training the workforce, its fifty percent costs would be subsidized.

Rather got most of the IT related equipments including computers and allied systems out of the VAT. Besides, he deleted most of the agricultural related items including fungicides and fertilizers from various VAT slabs. The agriculture specific concessions, Rather said are aimed at altering a sort of stagnation in the primary sector. J&K’s primary sector contributes 19.83% to the SGDP of Rs 48197 crore (at current prices). While the industry sector contributes 25.93%, it is services sector that overshadows every other sector by having a share of 54.24 percent.