Jammu & Kashmir: An economy in turmoilhttps://indianexpress.com/article/business/business-others/jammu-kashmir-an-economy-in-turmoil-tourism-jobs-unrest-economic-growth-3028034/

Jammu & Kashmir: An economy in turmoil

Tepid industrial growth, limited job opportunities, declining local businesses and deferred liability practice in government accounting are impacting the finances of the strife-torn state.

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Shikaras parked in Srinagar’s Dal Lake during a curfew imposed in the Valley in July. Source: Shuaib Masoodi

The mayhem on streets and the resultant clampdown in Jammu & Kashmir mirrors, in part, the turmoil in the state’s economy. Business activity has been marred by sustained phases of tepid industrial growth, a petering out of investments, limited employment opportunities, an over-reliance on Central funds and a deferred liability practice in government accounting that has been compared to “a classic version of a Ponzi game”.

All of this is reflected in the employment statistics. A comparison of the data from the sixth economic census of 2013 with the fifth economic census of 2005 shows that the number of males employed per establishment decreased by 2.79 per cent to 1.74, something that could have a bearing on the youth unrest in the Valley. According to the Reserve Bank of India’s regional office in Jammu, the cumulative FDI equity inflows received by the state from April 2000 to March 2016 were a dismal Rs 37 crore (Rs 1 crore in 2013-14, which surged to Rs 25 crore in 2014-15 to again dip to just Rs 11 crore in 2015-16). In comparison, across the other northern states of Punjab, Himachal Pradesh and Haryana, the cumulative FDI equity inflows during the sixteen year period was Rs 6,538 crore out of the total FDI equity inflows of Rs 1.50 lakh crore received in the country during the same period.

What makes it worse is that the state’s ability to step up spending as a counter to the minimal foreign investment is considerably limited, with the J&K government’s developmental expenditure being significantly low as compared to its administrative liabilities. Of the state government’s total expenditure for 2016-17 pegged at Rs 64,669 crore, capital expenditure is estimated at just Rs19,694 crore compared to a projected spend on salaries and pensions alone at over Rs 23,000 crore, which is more than the total developmental expenditure for the year. “We have been following the same pattern for last 40 years. This time we decided to increase it (the capital expenditure),” J&K’s finance minister Haseeb Drabu told The Indian Express. In fact, grants from the Centre comprise nearly half of total revenue receipts of the state.

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The state also ranks poorly in attracting domestic investment. As illustrated by the World Bank in its report on Assessment of State Implementation of Business Reforms 2015, J&K was among the worst performers with a rank of 29 out of 32 states and Union territories. “Low FDI in J&K may not be a complete surprise with domestic investment also being weak in view of its troubled history … In any state, investors will be interested to invest only when there is growth potential and administration and law and order are in place,” NR Bhanumurthy, professor, National Institute of Public Finance and Policy, said.

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Lower investments have been reflected in a slowdown in the growth rate of the state. As per the latest available statewise growth data maintained by the NITI Aayog, gross state domestic product of J&K at constant prices (2004-05 series) is projected to have fallen sharply to (-)1.57 per cent in 2014-15 from 5.63 per cent in 2013-14, 5.34 per cent in 2012-13 and 7.66 per cent in 2011-12 (2014-15 is the latest year for which data is available).

The three biggest employment generators in the region — handicraft, horticulture and tourism — are facing their own challenges. While the handicrafts of Kashmir are facing a serious threat from cheap machine-made imitations and counterfeits, which has affected the livelihood of around 2.5 lakh artisans of the state, tourism has been severely hit by the prolonged shutdown this year.

More serious is the fact that government finances in J&K are a ticking time bomb, especially with respect to deferring of liabilities. Since 1984, the state government started the practice of debiting from the gross salary the required General Provident Fund contribution of the employee and paying the net amount to the employee, an issue that was flagged by Drabu in the state assembly. Instead of earmarking the amount deducted for investments in long-term financial instruments, successive governments had apparently been channeling the net accruals on account of Provident Fund as captive resources to finance its day to day expenditure. To make matters worse, instead of accounting what it had borrowed from its employees, the net GPF was grossly understated in the Budget so as to get a higher allocation of market borrowings, a practice described by Drabu as “fiscal hara-kiri” and “a classic version of a Ponzi game”.

As a result, the total liability on account of provident fund, completely un-provided for, was pegged at Rs 14,058 crore as on March 31, 2015. The unravelling of the Ponzi scheme is the rollout of the National Pension Scheme (NPS) in 2009, post which, the new inflows stopped while the old outflows are continuing. The same procedure has been followed by successive government for State Life Insurance Scheme for government employees, for which the liability is another Rs 588 crore.

The mismanagement of government finances was also flagged by Comptroller and Auditor General of India (CAG) in its report on J&K’s finances for 2013-14 (April-March). “There were persistent errors in budgeting, savings, excess expenditure and expenditure without provision. Anticipated savings were either not surrendered or surrendered at the end of the year leaving no scope for utilising these funds for other development purposes,” the CAG report noted. The diversion of government funds for other activities was also seen in 2004, when under a debt waiver scheme announced by the Centre for houseboat owners, the required amount released by the government was diverted for other expenditures by the state government.

Then there’s the problem of power sector accounting, with Budgets over the years showing mounting losses emanating from the power sector. On the treatment of wages of the casual, seasonal and other categories of workers, many government departments, especially after engagement of casual workers was banned in 1994, have been paying wages from the operations and maintenance (O&M) component of capital expenditure or from maintenance and repairs. As a result, the wages are paid irregularly and the amount the government spends on wages is artificially subdued. And there is no money for maintenance of our capital assets. Drabu, while highlighting this problem, had in his Budget for 2016-17 changed this system by insisting on paying wages from the head of accounts where it is to be paid from, resulting in an increase in total revenue expenditure.

The casualty of this accounting irregularity has been the tracking of the ad hoc and casual recruitment in the government, the absence of which has resulted in the involved amounts touching unmanageable proportions, affecting some 61,000 people engaged in various ways.

According to data from the J&K budget in 2015-16, the government’s total expenditure was Rs 51,670 crore, out of which capital expenditure stood at Rs 14,473 crore, while spending on pensions and salaries was a massive Rs 20,770 crore. Out of total revenue receipts of Rs 51,460 crore in 2016-17, total Central grants — including plan and non-plan grants — were estimated at Rs 27,721 crore. In the previous financial year, total Central grants were at Rs 21,373 crore out of the total revenue receipts of Rs 40,904 crore, while in 2014-15, Central grants stood at Rs 16,149 crore out of total revenue receipts of Rs 28,938 crore.

The rise in Central grants has been notwithstanding the increase in state’s own revenues, which have increased to Rs 14,239 crore from Rs 11,443 crore in 2015-16 and Rs 8,312 crore in 2014-15. Among the 11 special category states, J&K has received the highest grants from the Centre in the last decade. As per the Ministry of Finance data, J&K has received Rs 1.06 lakh crore in grants from Centre from April 2006 to March 2016, followed by Himachal Pradesh and Assam, which received Rs 53,670 crore and Rs 46,446 crore in grants, respectively.

On the employment front, as per the latest available official figures, even though total employment increased by 66.4 per cent to 10.84 lakh as per sixth economic census of 2013 from fifth economic census of 2005, the number of males employed per establishment decreased by 2.79 per cent to 1.74 in J&K. The employment number for females per establishment was more encouraging with a rise of 53.9 per cent seen during the same eight years. The annual growth rate of employment during 2005-2013 has been 6.57 per cent, with a rise of 7.12 per cent seen in rural areas and 5.94 per cent in urban areas.