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There is a serious investment aversion in J&K today and deep uncertainty about the future. Most businesses with loans to pay off are unlikely to survive

The Rs 1,350-crore business relief measures announced for Jammu and Kashmir have made curious headlines in the country. Close on its heels, news reports on Monday said that J&K was among 21 states and union territories that had signed up for the Centre’s new borrowing plan to offset the GST revenue shortfall. But would these measures put a stop on job layoffs, business closures, bankruptcies? More importantly, would they help create jobs and promote overall demand for goods, services and investment in J&K? 

From a macroeconomic perspective, would these measures help generate revenue for J&K and contain the ominous fiscal deficit? These measures, after all, are mostly administrative and compensatory in nature, which are neither likely to address the demand side issues nor the imperatives of a favourable political environment.

The fact is that Jammu and Kashmir’s economy is in a bad shape today. Since 5 August 2019, when the Narendra Modi government abrogated Article 370 and stripped the region of its special status, businesses have been going bankrupt like never before. As per a soon-to-be-released report, 60 to 80 per cent jobs in the organised private sector, mainly in services and industrial sectors, have vanished. While the agriculture sector is surviving as of now, it has largely been reduced to being a subsistence activity.

What is highly worrying is the big dip in J&K’s tax revenues, unsustainable fiscal deficit, liabilities of Rs 82,332 crore, and a future economic outlook that doesn’t sound promising at all.

These have been mainly due to curfews, changes in land and job policies, and Internet shutdowns in the post-August 2019 era.

J&K’s debt trap

The current fiscal situation has implications, both for how the Centre manages revenue-sharing with states in the post GST-era and how discretionary grants were channelled to J&K in the past to manage its budget deficits.

The Reserve Bank of India (RBI)’s State Finances: A Study of Budgets of 2019-20 report says that J&K today is the only state/UT in the country whose fiscal deficit is over 7 per cent of its GSDP. If RBI data is anything to go by, J&K’s total outstanding liabilities stand at Rs 82,332 crore as on March 2020, which is 48 per cent of its GSDP.

J&K’s Gross Fiscal Deficit (GFD) is 6.5 per cent of its GSDP, which is second only to Manipur (6.6 per cent). This ratio for most of the other states is between 0.3 and 3.5 per cent.

J&K faces a significant budget deficit this year, the actual quantum of which is yet to be known. In 2020-21, J&K’s revenue and capital receipts were estimated as Rs 91,100 crore and Rs 10,329 crore, respectively, with an estimated fiscal deficit of Rs 10,200 crore.

Early this year, the National Institute of Public Finance and Policy (NIPFP) said in a report that if J&K’s reliance on borrowings maintained the current trajectory, its fiscal deficit will rise to 12 per cent of its GSDP by 2024-25.

At the GST Council meeting late last month, the finance ministry provided two choices to the states on GST compensation. Now that J&K has picked the first choice to address its revenue shortfall, the debt liabilities are likely to enhance, with barely any credible repayment strategy in place as of now.

Little room for public spending 

To provide some basic stimulus to the economy, J&K today has the classical Keynesian choices – that is, to unleash major public spending, or, to create conducive conditions for big private investment.

A major public spending is out of question because neither J&K nor the Centre has the fiscal room to do so. A big scale private investment is hard to come by because the business sentiment is at its bottom and there is immense uncertainty about the future.

It is important to know that the percentage of J&K’s own tax revenue to its GSDP was one of the highest in India in the pre-2019 period. According to the RBI, between 2011- 2018, J&K’s own tax revenues were 6.5 per cent of its GSDP, which was much better than states such as Gujarat, Haryana, Rajasthan, West Bengal, Bihar and Uttar Pradesh.

Similarly, the percentage of central tax transfers to J&K’s GSDP between the 2011-2018 period was a healthy 23 per cent.

So what are J&K’s options today? Is it really in a position to borrow more as Finance Minister Nirmala Sitharaman wants it to?

The structure of J&K’s debt liabilities has some interesting insights. While market borrowing comprises 51 per cent of the total liabilities, loans from the Centre are merely 1 per cent. That means the Modi government is reducing J&K’s reliance on central loans.

investors didn’t come 

The objectives of the J&K’s Fiscal Responsibility and Budget Management Act, 2006 are absolutely clear: that the government is responsible in ensuring inter-generational equity in fiscal management, to ensure that its borrowing is not reckless and doesn’t crowd out private investment; and that prudent house-keeping must be balanced with development and sustainability perspectives.

In today’s situation, there is a serious investment aversion in J&K. Most businesses with loans to pay off are unlikely to survive. There is deep uncertainty about the future with all that is happening globally and at the borders. 

Those driving the policy on J&K today had banked their hopes on outside investors. Very few investors are actually coming, that too for taking benefits of the incentives announced by J&K administration. What most analysts overlook is the potential disruptive nature of such investment.

It is now an established fact that no matter the quantum of investment, J&K is at a geographical disadvantage to make goods manufactured here competitive enough for exports. If outside investments are to focus on manufacturing goods and creating services for J&K’s internal consumption, then they would simply end up crowding out local investors and replace the existing manufacturing base and the supply chain. That would again be disruptive both in political and economic terms.

Economics is tied with political

The business ecosystem that thrived until 2019 has been turned almost upside down. The political and macroeconomic policy formulations work largely at cross-purposes. Even as the avowed objectives of the tectonic changes made to the political and economic structure of J&K are said to improve the former state’s socio-economic conditions, there is a clear logical mismatch between the unfolding policy interventions and the intended results. The consequent divergence is taking us to an unknown territory.

In any political economy system, economic activities are an immediate function of the conduciveness of the prevailing political environment. The stability of a political system, naturally, is a function of the quality of people’s engagement with and ownership of that political system.

Today, more than cosmetic economic measures, what would matter is how the Modi government creates a stable political system in J&K with due ownership of its people. That is the only key to everything.

Arjimand Hussain Talib is founding editor of Ziraat Times and has worked on international development in thirteen countries. 

This article was originally published on The Print.
Views in this article are author’s own and do not necessarily reflect CGS policy.