Band-aid Budget

Minister of Finance, Minister Omar Abdullah, could have helped the Chief Minister move forward a step or two in fulfilling his commitment and the existential agenda of all political parties to restore full statehood. Alas, that was not to be.

An important difference between a State and Union Territory (UT) is that the Constitution under Article 270 entitles state governments to a share in central taxes, but not the UTs. Accordingly, the Finance Commission does not consider UTs as states or determine any principles for sharing taxes or even grants-in-aid.

However, what the elected government of J&K has missed is that The Jammu and Kashmir Reorganisation Act of 2019 which made J&K a UT, requires that it be treated as a state for the transfer of net tax proceeds. The thin edge of the wedge that could have started the process of J&K being at par with other states is laid out in section 83, sub-section 1 of the Act which provides that “the President (of India) shall make a reference to the Fifteenth Finance Commission to include Union territory of Jammu and Kashmir in its Terms of Reference and make award for the successor Union territory of Jammu and Kashmir”.

Using this clause, the elected government of J&K should have represented the Union to reclaim a share in the central taxes. It may not have given the state more money but would have equated J&K with states in financial relations with the Centre. The “Transfer of Assistance to UT under MHA Demand” would get replaced by Share of UT in Central Taxes (Table 7). A small matter of financial detail but a big political gain. Its ramifications could have been leveraged in the long battle for statehood that lies ahead.

To further buttress J&K’s contention and claim, recourse could have been taken to the specific provisions of GST laws laid out by the GST Council, constituted under Article 279A of the Constitution, which treat UTs with legislatures as ‘state’ for levy of GST, as well as devolution of GST compensation cess.

In the event of the Union not agreeing, the J&K government could have sought judicial remedy. The courts have always adopted a contextual approach in declaring states to be inclusive of UTs by relying on Article 367 to apply the definition of State under Sec 3(58) of the General Clauses Act.

Politically, what would have made the case stronger for J&K as a UT with legislature is that they are responsible to the electorate. As such, it is constitutionally improper to deny them a reasonable share of the central tax pool so that those governments can implement their electoral promises.

Be it ignorance or indenture, an opportunity was missed. The result is a budget bereft of political context which reads like the Union FM’s eighth J&K budget and not the State FM’s first.

The impact of this lapse distorts budgetary arithmetic. About Rs 42,000 crores out of the estimated total government income of Rs 98,000 has been shown as “grants from the Union” instead of J&K’s “share in taxes”. Apart from the political optics of the former depicting fiscal servility and dependence, and the latter reflecting position and entitlement, it has operational implications on financing of the Rs 1.12 lakh crores estimated to be spent during the fiscal year 2025-26. While the sources of government income are standard, where and how the money is spent determines the impact of the budget on growth and development.

Also, how the gap of Rs around 14,500 crores between income and expenditure has been financed -- borrowings of Rs 8,600 crores, and Rs 6,000 crore by selling some assets, raising additional revenues, and some scrounging – has a bearing on the developmental outcomes of the budget.

The budget projects the state economy to grow at 9.5 per cent during 2025-26, higher than the national economic growth of 6.5/7 per cent. Yet, the fiscal stance of the budget is contractionary: total expenditure as a percentage of the State Domestic Product (SDP) is budgeted to decline sharply from 48 per cent in 2024-25 to 44 per cent in 2025-26. The macroeconomics of the budget is thus flawed.

As a result, despite being a balanced budget, two key imbalances continue: first, the debt servicing is more than developmental expenditure. What this means is that the government is spending more to pay for the past expenditure rather than to fund new developmental works.

While the budget shows that total capital expenditure, i.e., expenditure on infrastructure, is Rs 37,000 crores, the reality is quite sobering. More than one third of this amount is to repay past debts, so that the actual capital expenditure on the state’s developmental priorities is only Rs 17,500 crores, less than half of the budgeted number.

The other imbalance is that the allocation to economic services is only half the allocation to administrative services despite police salaries now being funded by the Union. In business parlance, it is a situation where the overheads are double the business costs.

The sectoral allocations fail to address the two major development dampeners viz: the high-cost structure and the high import intensity. Being geographically disadvantaged, the cost structure of the valley economy is high which impacts margins of all small businesses making them either uncompetitive or operate on wafer thin margins. Any shock to the system renders them unprofitable and unable to service their borrowings. For the export-oriented import-intensive economy of the Valley, the big idea of this budget should have been to move the economy to a lower logistics cost frontier.

The developmental deficit is also a result of the high import intensity of the economy. The total imports in 2024 were Rs 92,248 crores which translates into an import intensity of over 35 per cent. As a consequence of the high import intensity, the multiplier effect -- impact of investment or spending on the total economic output -- is very low, almost negligible, classically termed as the “missing multiplier”. This along with a yawning trade deficit and adverse terms of trade results in a flow of capital away from the state. The capital drain cannot be addressed by subsidizing large corporates. Instead, the budget should provide support and protection to the local entrepreneurs. In the incentive versus infrastructure paradigm, the focus should be on the latter.

Tail piece:

The budget continues all the adjustments made from 2019 to 2024 which impair the sanctity and integrity of the budget numbers. Here is a sample of three startling errors:

First, drawing monies like unclaimed deposits of EPF, surplus of institutions like Jammu Development Authority, and Srinagar Development Authority, to show them as revenue receipts under “CRISP”, a head unknown in any budget manual, has been continued. Introduced in 2021, it violates financial rules and regulations. For instance, unclaimed EPF money must be transferred to the senior welfare fund (SCWF) as notified by the finance ministry.

Second, receipts from asset monetization have been clubbed with CRISP and ARM and classified as revenue receipts. This violates basic budgetary principles because receipts from asset monetization, presumably sale of some PSEs, are capital receipts. Technically, these are to be classified as non-debt creating capital receipts. This is not a quibble as Rs 6000 crores are budgeted under this head. It is pure fantasy, if not fiction.

Third, the rate of investment of 14.3 per cent, includes the repayment of debt. In no lexicon of the budget anywhere in the world is debt repayment a part of the rate of investment.

These serious errors must be rectified otherwise it is tantamount to misleading the house. It would be in order for the FM to move a supplementary finance bill correcting the errors and setting the record straight. Perhaps, the budget should have been presented with E&OE disclaimer!

The author is Contributing Editor Greater Kashmir