Gautam Sen
The Fourteenth Finance Commission (FFC) headed by Dr. Y.Venugopal Reddy, empowered under Article 280 of the Constitution of India to recommend on, devolution of proceeds of taxes and duties to the States from the shareable pool of Central resources and grants-in-aid of the States` revenues , will be visiting Jammu & Kashmir (J&K) early next month as part of the its consultative process involving interaction with the State Govts. and Central Ministries. The FFC in fact, was to visit the State in the second quarter of (2013-14) along with the other Special Category States (this is a grouping of basically the hill States and States which are economically constrained owing to shortage of financial and logistical resources and political factors viz. the north-eastern States, Uttarakhand, Himachal Pradesh and Jammu & Kashmir). The planned visit of the FFC to J&K had to be put off in (2013-14) as the State Govt. was facing internal constraints like the Kishtwar riots and imperatives of rehabilitation work and other political compulsions. Now, when the FFC is well into its second year with its report scheduled by 2014-end, and their consultations completed with nearly all States, the J&K Govt. should present a comprehensive and balanced picture of its fiscal position, administrative requirements as well as impediments and developmental concerns, to the Constitutional body, so that the State does not lose out financially in the prospective FFC award covering the period {(2015-16) to (2019-20)}.
J&K`s resource position has not improved in a substantive sense, over the past few years. While the inflow to the State has gone up to an extent as per the total quantum of funds devolved from the Centre`s divisible pool of tax receipts increasing from Rs.3067 crs.(2011-12) to Rs. 3870 crs.(2012-13), grants-in-aid (Plan & Non-Plan combined) have decreased from Rs. 14591 crs. to Rs. 14354 crs. during the same period. However, total quantum of own tax revenue (OTR) and non-tax revenue (NTR) generated during the coterminous period, have increased from Rs.4576 crs. to Rs.7993 crs. Nevertheless, there is a substantial deficit in NTR resulting from unrecovered cost of procurement and supply of power and because of some water usage charges dues realized from NHPC kept out of govt. account. The increase in power dues has been phenomenal – from Rs. 275 crs. in (2002-03) to Rs.2281 crs. in (2012-13).
The Thirteenth Finance Commission (TFC) had awarded the State a total sum of Rs.40439 crs. ( from the Central shareable pool of taxes & duties and grants) for the period (2010-11) to (2014-15). Over and above Rs. 40439 crs., J&K will also get a portion from the total amounts of Rs. 5000 crs. earmarked for each of the activities of reduction in infant mortality and augmentation of renewal energy resources, for all the States combined. These amounts are a significant enhancement from the Twelfth Finance Commission total award of Rs.20880 crs. covering the period (2005-06) to (2009-10). The resource problem of J&K has arisen because of, OTR though buoyant being insufficient, and the huge NTR shortfall mentioned above, to cover the State`s Revenue expenditure, and more particularly the Non-Plan Revenue expenditure.
OTR as a ratio of the State Gross Domestic Product (GSDP)(new series with base year 2004-05 ) has varied marginally from 5.41% in (2006-07) to 7.66% in (2012-13). NTR receipts` growth has been even lower than OTR, varying from 1.90% to 2.84% during the same period. This seems to indicate that, notwithstanding greater consumerism, energy consumption among the people – which actually should have lead to higher sales tax, value-added tax earnings and realization of electricity tariffs; tax avoidance has prevailed as a strong phenomenon among the people and, the State has either not had the will or been incapable of improving the effectiveness of its taxation machinery towards garnering such receipts. The State Govt. may therefore have to convincingly explain its position in the above regard to the FFC, and perforce indicate some viable and politically acceptable measures to the latter towards mopping up higher receipts during the FFC award period (2015-16) to (2019-20).
Unless the State Govt. is forthright in clarifying its constraints and is also able to indicate a viable action plan to turn round the uncomfortable receipts scenario, the gap between the amount likely to be received by the State with reference to the FFC award as part of the devolution from the Centre`s pool of divisible resources (Centre`s collection of income tax, excise, corporation tax, receipts, etc.) and the various performance targeted grants, and the State`s unavoidable Non-Plan expenditure minus its OTR and NTR receipts, is unlikely to be met from the Non-Plan Revenue Deficit (NPRD) grant to be awarded additionally by the FFC over and above the Central transfers mentioned above. The NPRD grants awarded by the Finance Commissions, are normally intended to bridge the Non-Plan resource gap of the States. Though the Non-Plan resource gap of J&K as a per cent of the State`s total Non-Plan expenditure may not be the highest as compared to some of the other Special Category States of the north-east constrained from resource angle, the State has a serious problem owing to its huge financial burden on salaries, pensions, interest payments and power-related deficit cited above. The worrisome aspect is that, these four elements constituted 88.6% of the total Non-Plan Revenue expenditure in (2012-13). The State will face a difficult situation if it is unable to eventually obtain an NPRD grant of an adequate level to fully offset its Non-Plan resource shortfall. Diversion of Plan funds are already taking place on Non-Plan activities eg. Rs. 3746 crs. were diverted of a total Plan grant of Rs. 10274 crs. ie. 36% in (2012-13), to the detriment of developmental activities. Without a suitable NPRD award by the FFC, the phenomenon of Plan funds` diversion on Non-Plan account and with consequent adverse ramifications, will get further accentuated.
The State Govt. indicated a personnel strength of 433670 in (2012-13) as against the State`s population of 12548926 as per the Census (provisional data) in census-covered areas. The State Govt. personnel strength of approximately 3.5% of the total population, is unusually high. Unless some time-bound measures are adopted by the State Govt. to taper off the personnel strength over a defined period, and also upgrade their skills and also redeploy them for improved service delivery as part of better governance, the State`s fiscal position would continue to remain precarious. There would also be concomitant failure to adhere to the J&K Fiscal Responsibility & Budget Management Act (FRBMA) norms and the TFC target on fiscal deficit ( fiscal deficit is the difference between Revenue receipts plus non-debt Capital receipts and the total expenditure including loans net of repayments). Fiscal deficit was 5.5% of GSDP in 2012-13 vis-à-vis 4.2% specified by FRBMA and TFC. The State is also obligated to achieve the parameter indicated by TFC on Non-Plan salary expenses net of pension and interest payment liability, which should be 35%. The FFC cannot be reasonably expected to agree to any offsetting grant or a large enough NPRD grant to absorb the financial liability on a long-term basis, of an exorbitantly high personnel cost.
J&K is uniquely placed among all States of the Indian Union. There is no gainsaying this fact. Govt. of India has also stepped in adequate measure to facilitate developmental activities in the State Govt.`s domain in the Plan sphere. However, suitable governance mechanisms and structures to derive benefits from these interventions, have to be put in place. While the FFC may not be oblivious of the J&K`s special backdrop, it may be incumbent on the part of the State Govt. to highlight to the Commission a realistic plan of action backed up by political will and sufficiently insulated from local vicissitudes, to start a process of augmenting its internal resources and gradual reduction of the burgeoning Non-Plan resource gap. If the State Govt. can work out a course of action as such, the FFC may be in a position to incentivize the position in favour of the State by award of an NPRD grant which at fully nullifies the Non-Plan Revenue deficit anticipated post-devolution, over the period (2010-11) to (2014-15), and the State Govt. has perforce not to divert Plan grants for Non-Plan expenditure to the detriment of asset creation and developmental needs.
(The author is presently serving as Adviser to Govt. of Nagaland (on Finance Commission matters). The author has served in J&K under Govt. of India during (2008-10). (The data in the piece is based on 12th and 13th Finance Commission Reports and AG’s Audit reports)
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