“ There is nothing new in world except the history you do not know.” – Harry Truman

Financial wiz Dr. Haseeb Drabu, who has the dubious distinction of taking doublespeak to its glory during his years in authority by calling highly subsidized J&K budget as “zero deficit budget,” can also be brutal and frank in his retirement. He lays out the case against false statements perpetuated by the National Conference and the Chief Minister. Drabu says allegations of low allocation of central assistance is a red herring that seeks to divert attention from the gross fiscal mismanagement of the last five years

Problem of the Plan

Haseeb A Drabu

The annual state plan, normally a low key technical matter, has evoked considerable public interest this year. No sooner was it finalized with the Planning Commission (PC), the Chief Minister expressed his dismay over the “low annual plan allocation to JK”. Many political analysts deciphered the “political smoke signals” and journalists saw it as yet another “snub” to the state government. The government economists are writing unending articles on PC’s lack of understanding of the J&K economy while the industry bodies are venting their anger on it.
The bewilderment at the Plan “fiasco” behooves only the ignorant. The facts are quite simple: the fiscal management of the state government for the last five years has been exceptionally poor. It this that has led to the truncation of the state plan size. Here is how.

The PC has provided Rs 10,396 crore as central assistance to the state plan. This amount is more than sufficient to cover the approved plan of Rs 7,300 crore. Indeed, it should not only be able finance the state government’s proposed plan of Rs 8,000 crore but also leave a surplus of Rs 2,396 crore for all the frills and fancies of the state government.

As such, by no standards whatsoever is the plan allocation low. For instance, Assam, a comparable special category state, has got a central assistance of Rs 8,873 crores to finance a plan of Rs 12,500 crore. That is how it ought to be: plan size should be more than the central assistance. In the case of J&K, it is the opposite: the central assistance is higher than the plan! And has been so for a while now.

What is happening to the money that the PC is giving? Of the Rs 10,396 crore allocated for the state plan, Rs 6,867 crore is being used to meet the non-plan deficit. This leaves the state with Rs 3,529 crore of central assistance for the plan. To this are added borrowings of Rs 3,770 crore to arrive at a plan size of Rs 7,300 crore instead of the Rs 8,000 crore proposed by the state. Why was the plan size cut?

Simply because, in the last five years, Centre’s assistance to the state plan has increased by Rs 6,000 crore but the size of the state plan has increased only by Rs 2,800 crore! The difference between what the Centre gave and what was used in the Plan — Rs 4,200 crore has been diverted to fund non plan expenditures. The implication is straight forward: irrespective of the past legacy, incrementally the fiscal situation in the last five years has worsened substantially.

For the record, what did this government inherit as it fiscal legacy, in terms of plan financing, from the previous regime? In 2008-09, the state plan of Rs 4,500 crore was financed through central assistance of Rs 4,403 crore. The plan was bigger, albeit marginally, than the central assistance. The state contributed, in the form of state’s own resources, Rs 97 crore to its own plan.

Five years later, in 2013-14, the state’s own resources are budgeted to be negative; (-) Rs 3,200 crore. What this means is that the current expenditures exceed current revenues including borrowings by Rs 3,200 crore. It can’t get any worse than this when a government borrows to defray its current expenditure and still not able to meet all its current liabilities. In less than five years, the state has skillfully been driven from poverty to penury.

The poor fiscal health is ascribed, from the peon to the principal secretary, to the problem of power; the under recoveries, the low tariffs and then, of course the Indus Water Treaty! That the power revenues and expenditures distort the fiscal balance is correct to some extent. It was precisely in recognition of this structural issue the PDP led coalition had introduced a separate power budget as Part B of the state budget. It was done to ensure that fiscal policy doesn’t get distorted by the power sector.

Till 2008-2009, power deficit was indeed the main contributor to the over deficit. That year, state’s balance from current revenues (BCR) was (-) Rs 2,000 crore while the power deficit was Rs 1,400 crores. This meant that the non-plan deficit of the state without power was Rs 600 crores which was easily covered by the plan grants. Not anymore. The BCR projected by the state now is (-) Rs 7,800 crores! The power deficit for 2011-12 was Rs 2,000 crores. Assuming an increase by 40%, it will now be around Rs 2,800. Even then, the state resource position budget without any impact of power deficit, has a gaping hole of Rs 5,000 crore! In fact now the non-plan deficit without power is now almost double that of the power deficit. This is the real problem.

The implication of this fiscal crisis is that even the Rs 7,300 crore state plan will largely be on paper only. For, Rs 1000 crore borrowing in the plan is in violation of the ceiling of Rs 2,771 crores. If approved, by the Ministry of Finance, it will fritter away the big advantage of J&K’s plan financing of 90 per cent grants and 10 per cent loan. Actually the plan then is 51 per cent loan financed and not 10 per cent as is claimed. If it is not approved, then the Rs 1,000 crore is a pie in the sky, and the effective plan is only about Rs 6,300 crore.

Further, the non plan deficit projected by the state government was Rs 7,837 which has been “improved” by the PC to Rs 6,939. In real terms, a gap of Rs 898 crores has been left unfunded. Adjusting for this, the plan is down to Rs 5,400 crore. Out of which, Rs 2,300 crore are tied grants, wherein the state government has no flexibility. The actual state plan then reduces to Rs 3,100 crore! Finally, using the proportion of plan capital expenditure given in the budget 2013-14, the total capital expenditure in the plan will not even be Rs 2,500 crores! No wonder if people complain of where the money disappears! The fact is that it wasn’t there from the beginning. The emperor, it turns out, doesn’t have any clothes.

(Reproduced from the Greater Kashmir)