Dilli and Srinagar must help J&K – Part II

By: Arjimand Hussain

In the first part of this article on Sunday, we discussed the state of J&K’s fiscal deficit and the elbow room available for greater public spending to pep up the sagging economy. In this part we would look at other indicators and a possible way forward.

A lot is often said about J&K’s ‘enormous’ public salaries bill. If the RBI data is anything to go, J&K’s total revenue expenditure is 47.7%. This includes spending on salaries, pensions, and interest payments. While this percentage looks big, the fact is that the revenue expenditure obscures several other expenditures as well.

An analysis of J&K’s expenditure on wages and salaries data in the RBI report makes an interesting reading. J&K’s current expenditure (2024–25) on wages and salaries is ₹22,445 crore. This seemingly marks a major increase from ₹15,120 crore in 2017–18.

However, let us compare this with other states/UTs. In terms of the scale of expenditure on wages and salaries, J&K’s expenditure is modest compared to states like Maharashtra (₹62,225 crore), Uttar Pradesh (₹64,373 crore) and most other states.

While for a state with a relatively smaller population and economy, ₹22,445 crore may be considerable but J&K is not the only one is providing government jobs. The 11.7% pension liability, for example, is very comparable with other states and matches the national average. So, is there any need for undue alarm?

When it comes to interest payment, J&K’s interest burden is now 11.9% relative to its revenue expenditure, which is actually below the national average of 12.9%.

Looking at the interest payment in relation to revenue receipts, J&K’s percentage in 2022-23 was 12 %, which is slightly below the national average of 12.3%. Moreover, J&K’s development expenditure was 61.5% in 2023-24, signaling that a good proportion of our spending is directed towards development activities, slightly below the national average of 62.9%.

However, compared with states like West Bengal (19.4%) and Punjab (19.1%), J&K’s 11.9% interest payment liabilities actually makes it a state with moderate interest burden.

Similarly, on interest payment in relation to revenue receipts, J&K actually does very well with 12% in comparison with states like Punjab (27.1%), West Bengal (22.7%) and most other states.

J&K’s reliance on central transfers and grants are often cited as a major limitation for J&K.

The 65.1% gross central transfers to J&K in 2023-24 do look huge, and well above the national average of 36%. However, what the RBI report does not specifically indicate is the actual breakdown of the central transfers. As a state, J&K was entitled to a share of central taxes, including statutory grants and also the discretionary grants.

Now the central transfers seem to be made through grants and allocations from the central government, as outlined in the Union Budget. The exact breakdown of these grants and transfers for  2023-24 has not been detailed in the available public documents from the Reserve Bank of India (RBI) or the Comptroller and Auditor General (CAG).

In the absence of such data, an analysis of Devolution and Transfers to J&K from the Centre in recent years, including the gross and net transfers from the Union Government to states and Union Territories between 2022-23 and 2024-25,  could be very insightful.

As per RBI data, year-wise net transfers to J&K between 2022 and 2024 are these – 2022–23: ₹67,076 crore; 2023–24 (RE): ₹67,136 crore and 2024–25 (BE): ₹69,925 crore.

This shows a growth of only 4.2% in net transfers to J&K in 2024–25 vs. 2023–24.

In comparison, states like Uttar Pradesh (₹3,33,474 crore in 2024–25), Bihar (₹1,67,672 crore in 2024–25) and at least five other states receive significantly higher transfers.

To avoid a magnitude bias, the 4.2% growth rate of gross transfers to J&K is much lower than even the north-eastern states like Meghalaya (42.9%) and Mizoram (35.0%).

Previously, as a special category state, J&K benefitted from 90:10 funding ratios for central schemes and other financial advantages. While these benefits have reduced post-2019, the growth in gross and net central transfers is modest compared to states with higher economic activity and better revenue generation.

With a qualitatively better breakdown of the central transfers to J&K, one could say with greater certainty what kind of fiscal room J&K actually has today to help the economy through greater public spending. But what is plausible is that J&K needs more public sector jobs, capital investment, a breather to struggling businesses, greater support to banks in improving their NPAs, better power supply and remunerative development projects.

In recent years, J&K’s fiscal reforms have paid dividends, but the economic sentiment is gloomy. Better compliance with the GST regime through smoother tax payments through the GSTN portal has helped raise more revenue. Greater dealer registration has widened the tax base. Reforms implementation in feeder and consumer metering for electricity has shown good results too. Some degree of asset monetisation in tourism and mining has fetched some resources too. Importantly, austerity measures across all departments has promoted savings. Acquisitions through the Government e-Marketplace (GeM) has been impactful too. Certain expensive loans have been prepaid to reduce interest burdens. The full implementation of Net Borrowing Ceiling (NBC) has enabled debt management. Certain pointed actions to reduce ways and means advance (WMA) and overdrafts (OD) have yielded good results too.

While these reforms must sustain, looking at the gloom in the private economic system in J&K today, Union and J&K governments must consider loosening their purse strings. Some prudent and growth-oriented public spending would help lift the economic sentiment, The time for doing that is now.

The author, an international development expert, having worked across 15 countries, is founder of Ziraat Times.