J&K and Budget 2024-25: Ms Sitharaman, I have something to say, please.

23 June 2024

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The annual budget time is here, and these are very interesting times. Irrespective of the changing colors of political landscapes, there is a constant in public governance: the imperative of human well-being and state interest. That imperative in democracies demands that we share views on issues of public importance in a frank but positive manner. That imperative also demands voices be heard.

As Finance Minister Nirmala Sitharaman is seeking public views on the design of the Union Budget 2024-25, it is important to highlight what Jammu & Kashmir (J&K) would demand in today’s circumstances.

From a political economy perspective, J&K is today in a far more conducive business environment compared to the last three-and-a-half decades. We have an industrial policy that offers attractive incentives along with a single-window clearance mechanism to potential investors. Red tape is, to a large extent, a thing of the past. Tourism is booming. The horticulture sector, if supported by a favorable market, is poised for a new era of prosperity. Local investor sentiment, somewhat weary today, is upbeat for the long term. Work culture and productivity have got better to a large extent.

Prime Minister’s public promise in Srinagar of Assembly elections and statehood in J&K ‘soon’ has a potential to invigorate business and investment sentiments further. A democratic and inclusive political system has a natural trait of making a business environment even more conducive for investment and new ideas. The upcoming budget could lay the groundwork for that important transition.

J&K is today faced with certain economic challenges that may not be too difficult to fix. We are faced with an economic growth that is characterised by high unemployment and under-employment. Seen from a macro-economic perspective, its Gross State Domestic Product (GSDP) pie continues to be high on services and agriculture, with low tax revenue potential, symbolizing its recurrent industrial weakness.

J&K continues to have a substantial public debt, with low disposable incomes among its lower and middle classes beginning to negatively impact its consumer market and real estate sector. The last few years have also seen an unfavorable deposits-to-advances ratio in the banking sector. The most concerning of all is the crippling energy crisis. The lingering revenue deficit in the power sector, coupled with low electricity availability to domestic and commercial consumers, are feeding a vicious circle and impeding economic growth prospects in the state.

These issues could be addressed in the upcoming budget through targeted interventions so as to sustain economic development and wellbeing in J&K.

Jammu & Kashmir’s Gross State Domestic Product (GSDP) has increased at a compound annual growth rate (CAGR) of 8.84% between 2018-19 and 2023-24. According to Economic Survey of India 2023, GSDP of J&K grew at around 8 per cent as against 7 per cent at National level during 2022-23 at Constant Prices.

While this growth rate sounds impressive, the data on J&K’s unemployment and under-employment for the corresponding period suggests that this growth does not come with corresponding jobs. The challenge today is to make this economic growth oriented towards job creation. Jobless economic growth for J&K can be a recipe for multiple challenges.

Agriculture sector remains the cornerstone of J&K’s economy, contributing approximately 19% to the GSDP. While the sector employs more than half of J&K’s workforce, yet its growth rate has stagnated at around 2.5% annually, which points to deep-rooted structural challenges in the sector. Such a poor growth rate suggests that meaningful job creation in the sector for the large educated rural workforce would be difficult in the coming years. While the sector could still provide livelihood opportunities for a large section of rural population in J&K in the future, it may not be able to interest increasingly educated rural workforce. Job creation for this population would necessitate expanding the ambit of the services and industrial sectors.

Despite years of concered efforts in developing industrial estates and state hand-holding, industrial sector in J&K is underdeveloped, contributing just 23% to the GSDP with a growth rate of 3% per year. This scenario is unlikely to get better in a foreseeable future.

The removal of the preferential state contracts quota and toll taxation system for imported industrial goods in the post-2019 era have left most of J&K’s nascent industries sick and unable to compete.

This change, coupled with overall lack of industrial activity, has limited job creation and economic diversification potential for an ever-increasing educated work force in J&K.

The services sector, although more promising, with a 58% contribution to the GSDP and a growth rate of 5%, lacks qualitative depth. The sector is dominated by low-value-added activities, reflecting a need for higher skill-based industries.

I have said it multiple times, J&K is an ideal place for Information Technology-based services, but we missed the IT bus in the early 2000s. India’s technology industry has surpassed an astronomical $250 billion in revenue in FY2023. The sector employed 54 lakh people as of March 2023. Now imagine J&K setting a target of just USD 3 to 5 billion revenue from this huge kitty and about 2 lakh jobs! It would solve most of unemployment problems in J&K. And this is no fantasy. J&K has the kind of human resources and the environmental conditions to translate this ambition into a reality. All it needs is some budgetary allocation to create a few high-tech IT Parks, ideally in public-private partnership. The private sector could do the rest like the likes of Infosys, Wipro and TCS did in Bengaluru, Hyderabad and Chennai in the 1990s.

J&K faces one of the highest unemployment rates in India today. The Periodic Labour Force Survey (PLFS) 2023 reported an unemployment rate of 16%, which is significantly above the national average of 7.8%. Youth unemployment is particularly severe, with the rate for individuals aged 15-29 years reaching 22%. This demographic challenge requires urgent policy actions. And that is doable and not at an unaffordable cost. The Budget 2024-25 should consider this.

I have been highlighting this for many years now: J&K’s fiscal health is precarious, with a debt-to-GSDP ratio of 49%, far above the recommended limit of 20-25% for states. This high public debt has been constraining J&K government’s ability to invest meaningfully in job-oriented infrastructure and programs. In the medium and long term, effective debt management and fiscal consolidation measures are inevitable. And the upcoming budget must factor that too.

One of the straightforward ways of doing that is to raise greater revenue while cutting the unproductive revenue expenditure. However, we have lately seen that consumption in J&K is under stress due to decreasing disposable incomes among the middle class. That would eventually translate into a sequential stress on government’s tax revenues. Today, the average disposable income in J&K is 15% lower than the national average, affecting consumer spending and overall economic dynamism.

Budget Priorities for 2024-25:

Given these economic realities, the Union Budget 2024-25 should prioritize those areas for long term investment which have the ability to generate jobs for its educated work force.

As the traditional industrial estates are largely struggling, it is high time to embrace a new model of Special Industrial Zones (SIZs). Existing industrial estates could be transformed into SIZs while additional SIZs could be established outside of the traditional estates. These SIZs would demand tax incentives and infrastructure support through public-private partnerships. These zones should focus on environment-friendly sectors where J&K has a competitive edge, such as information technology, computer hardware, handicrafts, horticulture, food processing and bio technology.

However, this transformation would not be possible without improving the power situation in J&K. While the government’s efforts have lately been focused on reducing the revenue deficit in the sector, the supply side would require additional commitments. The renewable energy thrust, for instance, is a timely one. However, that needs to be scaled up and allocation of more resources.

It is a given that our education system is largely out of sync with the skills the evolving job market needs. The rapidly-changing demands of the job market today are truly mind boggling. Consequently, a considerable percentage of our educated work force does not possess the skills required by today’s job market. J&K must overhaul its approach on skill development and engage the private actors to advise it who are at the cutting edge of this rapid change. The upcoming budget must consider suitable financial allocation for this much-needed shift.

While J&K’s agriculture sector is doing largely well, what troubles its financial viability are the production costs and the demand side pressures. These issues, as highlighted by J&K Cold Storages Association at a meeting with the Finance Minister last week, would require a consideration in the budget.

When it comes to the services sector, tourism sector is doing pretty well today. However, there is a need for a drastic improvement in investment in tourism infrastructure, including roads, accommodations, environmental sustainability and tourist amenities. J&K’s public tourism infrastructure is largely not fit for purpose today. As the sector is likely to see growth in the coming years, investment in public infrastructure and environmental sustainability measures would require focused attention in the upcoming budget.

Traditionally, financial support from the central government for critical infrastructure and economic projects in J&K has been pivotal in addressing the budgetary gaps in this state. That support must sustain but not for the sake of support alone but for creating high quality economic infrastructure, private investment, meaningful jobs and robust revenue generation for the state. All this is possible provided there is a willingness for making a new beginning with new ideas.

The writer is an international development expert having worked across 14 countries. He is founder of Ziraat Times.