Where does government money come from?

Kashmir Life offers a plain arithmetic of where from the state government mobilizes the huge amount that it spends a year.

Countries have their mints that print money which have its value decided under a well-established global system. J&K being part of a sovereign country lacks such flexibility. It needs a huge amount to run the systems in place. There are multiple sources for generating income.

May be the state’s policy makers will offer slightly different numbers compared to what the Comptroller and Auditor General of India has listed in its last report, but the fundamentals remain the same. CAG is the central government’s premier auditor that handles the accounts of all the states across India except Goa. The details and the figures being used in this piece are drawn from the CAG and not from the state government which may or may not be different.

Every state has got its own source of income at the state level. This comes from two sources – one is the tax base and another is non-tax base. J&K has a varied set of taxes. The state is a consumer market, a huge amount of the sales taxes are collected every year. Off late, the sales taxes are called the VAT – value addition tax. With every passing year, the VAT collections are increasing. While the officials can stake claim for making tax evasions a fool proof exercise, the real credit deserves the consumer who spends huge amount on whatever he or she needs. The increasing trend can partly be attributed to the growth in population.

The second part of the state income comes from the non-tax sources. These are usually services that government provides or sells to its people. It also includes shares from certain commercial exercises from governance companies or private initiatives. Power tariff is the main contributor to this source of state revenue. Though there is huge mismatch between expenditure being booked on certain services and the returns that the government receives, the overall trends are positive.

For J&K, the central government is a huge source of income. As part of the federation, the state is entitled to a part of the taxes and duties that government of India collects. There is a formula for the centre to share its tax booty with the state governments. Besides, J&K – as other state governments – has right to the grants within the systems that have evolved over the decades. In fact, CAG says the state government lacks a mechanism to count the devolutions from the central government that come beyond the state budget. Mostly, these amounts fall under various central sponsored schemes and are being directly transferred to the implementing agencies in the state. CAG, in its latest report, says an amount of Rs 1140.25 crore was directly transferred by the central government agencies to the implementing agencies during 2008-09. In 2009-10, this amount was pegged at Rs 1171.54 crore.

But all these funds not adequate enough to run the J&K state. The government still requires some loans to manage its expenditure. There are a number of systems for sourcing debts. One is directly from the central government, second is from various financial institutions and till recently the state government was managing overdraft from J&K Bank that the state owns to the tune of 53 percent. The system came to an end recently after the J&K government entered into an agreement with the central government making RBI its debt manager.

Besides, the state government is the custodian of earnings of its employees. It does liberally use their savings thus enabling CAG to make paper entries that soar J&K’s state’s indebtedness.


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