Modi government’s economic package for J&K is only cosmetic without political stability

Man walks past closed shops on deserted road amid curfew in Srinagar | Photo: Azaan Javaid | The imprint

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Trupee 1,350 crore business aid measures announced for Jammu and Kashmir grabbed headlines in the country. On its heels, news reports on Monday said J&K was among 21 states and union territories that had signed up to the Centre’s new borrowing plan to make up for the GST shortfall. But would these measures put an end to layoffs, business closures, bankruptcies? More importantly, would they help create jobs and promote aggregate demand for goods, services and investments in J&K?

From a macroeconomic point of view, would these measures help generate income for J&K and contain the worrying budget deficit? These measures, after all, are for the most part administrative and compensatory in nature, which are neither likely to resolve demand-side issues nor the imperatives of an enabling policy environment.

The point is, Jammu and Kashmir’s economy is in dire straits today. Since August 5, 2019, when the Narendra Modi government repealed Article 370 and deprived the region of its special status, companies have gone bankrupt like never before. According to a soon-to-be-released report, 60 to 80 percent of jobs in the organized private sector, mostly in the service and industrial sectors, have been lost. While the agricultural sector survives to this day, it has been largely reduced to a subsistence activity.

What is very worrying is the sharp drop in J & K’s tax revenues, an unsustainable budget deficit, a liability of Rs 82,332 crore and future economic prospects which do not seem promising at all.

These are mainly due to curfews, changes in land and employment policies and internet shutdowns after August 2019.

Read also : In Modi’s India, Kashmir’s economic disaster does not dent collective consciousness

J&K Debt Trap

The current budget situation has implications, both for how the Center manages revenue sharing with states in the post-GST era and how discretionary grants have been channeled to J&K in the past to manage its operations. budget deficits.

The State Finances: A Study of Budgets of 2019-20 by the Reserve Bank of India (RBI) indicates that J&K is today the only state / UT in the country with a budget deficit exceeding 7% of its GDP. Based on RBI data, J & K’s total outstanding liabilities stood at Rs 82,332 crore as of March 2020, or 48% of its GSDP.

J & K’s gross budget deficit (GFD) represents 6.5% of its GSDP, just behind Manipur (6.6%). This ratio for most other states is between 0.3% and 3.5%.

J&K faces a significant budget deficit this year, the actual amount of which is not yet known. In 2020-2021, J & K’s income and capital receipts were estimated at Rs 91,100 crore and Rs 10,329 crore, respectively, with an estimated budget deficit of Rs 10,200 crore.

Earlier this year, the National Institute of Finance and Public Policy (NIPFP) said in a report that if J & K’s dependence on borrowing kept the current trajectory, its budget deficit would reach 12% of its GDPD. by 2024-25.

At the GST Council meeting at the end of last month, the Department of Finance offered two choices to states when it comes to GST compensation. Now that J&K has chosen the first choice to fill its shortfall, debt liabilities are likely to improve, with hardly a credible repayment strategy in place at the moment.

Read also : Internet shutdowns and pandemic cost Kashmir Rs 40,000 cr, 5 lakh jobs, industry chief says

Little room for public spending

To provide a basic stimulus to the economy, J&K today has the classic Keynesian choices – that is, to unlock large public spending or create conditions conducive to large private investment.

A major public expenditure is out of the question because neither J&K nor the Center have the fiscal space to do so. Large-scale private investment is difficult to obtain because the business climate is at its lowest 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 during the period prior to 2019. According to the RBI, between 2011 and 2018, the own revenue J & K’s taxes accounted for 6.5% of its GSDP, which was much better than that of states such as Gujarat, Haryana, Rajasthan, West Bengal, Bihar and Uttar Pradesh.

Likewise, the percentage of central fiscal transfers to J & K’s GSDP between the period 2011-2018 was 23%.

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

J & K’s debt liability structure offers some interesting insight. While market borrowing represents 51 percent of total commitments, Center loans represent only 1 percent. This means that the Modi government is reducing J & K’s dependence on central loans.

Read also : How the internet shutdown in Kashmir has hit valley industries hard

investors did not come

The objectives of the J & K’s Fiscal Responsibility and Budget Management Act, 2006 are absolutely clear: that the government has the responsibility to ensure intergenerational equity in budget management, to ensure that its borrowing is not irresponsible and does not crowd out not private investment; and that prudent management must be balanced with prospects for development and sustainability.

In the current situation, there is a serious aversion to investing in J&K. Most businesses with loans to repay are unlikely to survive. There is deep uncertainty about the future with all that is happening globally and at the borders.

Those who run J & K’s politics today had staked their hopes on outside investors. Very few investors actually come, this too to take advantage of the incentives announced by the J&K administration. What most analysts overlook is the potentially disruptive nature of such an investment.

It is now an established fact that regardless of the amount of investment, J&K is geographically disadvantaged in making products produced here competitive enough for exports. If outside investments were to focus on manufacturing goods and creating services for J & K’s internal consumption, they would simply end up crowding out local investors and replacing the existing manufacturing base and supply chain. This would once again be disruptive both politically and economically.

Read also : Modi’s government doesn’t have too many options to boost Jammu and Kashmir’s economy

The economy is linked to politics

The business ecosystem that thrived until 2019 has almost been turned upside down. Much of the political and macroeconomic policy formulation works against the grain. Even though the stated goals of the tectonic changes in J & K’s political and economic structure are meant to improve the socio-economic conditions of the old state, there is a clear logical disconnect between ongoing policy interventions and expected results. The resulting divergence leads us into uncharted territory.

In any political economy system, economic activities are an immediate function of the enabling nature of the prevailing political environment. The stability of a political system, of course, depends on the quality of the engagement and ownership of that political system by the people.

Today, more than cosmetic economic measures, what matters is how the Modi government creates a stable political system in J&K with ownership by its people. This is the only key to everything.

The author is founding editor of Ziraat hours and has worked on international development in thirteen countries. Opinions are personal.

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