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A Mess Of Its Own Making

By Bilal Hussain

06 May, 2010

The state financial liabilities have long crossed the manageable level, pushing the economy deeper into red. And the government has only itself to blame.
Debt ridden Jammu and Kashmir is on the verge of drowning in the sea of financial liabilities. A recent report of the Comptroller and Auditor General of India has revealed that the state fiscal liability for 2008-09 was a whopping Rs 24,287 crore.

Almost every state and country has fiscal liability. However, it becomes a matter of deep financial concern when liabilities grow at a high rate and touch an unsustainable level, as is the case with J&K. The fiscal liabilities of the state increased from Rs 13,038 crore in 2003-04 to Rs 24,287 crore in 2008-09. The growth rate was 13.67 per cent during 2008-09 over the pervious year, which should be a matter of much worry. The ratio of fiscal liabilities to GSDP also increased from 58.82 per cent in 2003-04 to 69.78 per cent in 2008-09. To put the figures in perspective, J&K has crossed the sustainable debt level.

While the buoyancy of these liabilities with respect to GSDP during the year was 1.44, indicating that for each one per cent increase in GSDP, fiscal liabilities grew by 1.44 per cent. The liabilities are 1.70 times the stat’s revenue receipts and 6.90 times its own resources. The financial policy makers and think-tanks of the state at this critical junction should strive for fiscal consolidation, which would involve growth in revenue, reduction in expenditure or at least expenditure growth and other receipts, like disinvestment, smart investments, etc.

A closer look at the investment patterns and returns of the state government presents a gloomy image. As of March 31, 2009, the state government had invested Rs 364.61 crore in statutory corporations, rural banks, joint stock companies and co-operatives. The average return on this investment was 8.60 percent while the government paid an average interest rate 9.7 per cent on its borrowings during 2007-2009. Return on the investment made in these PSUs ranged between Rs 20.62 crore and Rs 40.85 crore during 2004-2009. Returns on investment amounting to Rs 40.85 crore in J&K Bank during 2008-09 was Rs 39.95 crore, on investments in Jammu and Kashmir Cement Limited was Rs 60 lakh and on investments in Jammu and Kashmir Projects Construction Limited was Rs 30.40 lakh. With an average interest rate of 6.91 percent paid by the government on its borrowings, the return on these investments during 2008-09 was 11.20 per cent.

There were 20 government companies (17 working and 3 non-working) and three statutory corporations (all working) under the control of the state government. The total investment made by the state in the working PSUs till the end of March 2009 was Rs 333.24 crore. Out of the 17 working companies, only J&K Bank had finalized its accounts for 2008-09 (September 2009) and earned profit of Rs 409.84 crore for the year. Of the fifteen other working companies, which finalized their accounts for previous years by September 2009, only three companies earned an aggregate profit of Rs 2.51 crore. Of the 12 loss-incurring working government companies, nine ran losses totaling Rs 524.01 crore, which exceeds their aggregate paid-up capital of Rs 67.05 crore.

But despite their poor performance and complete erosion of paid-up capital, the state government continues to provide financial support to these companies in the form of contribution towards equity, further grants of loans, subsidy, grants, etc. According to available information, the total financial support provided by the state to eight of these nine companies during 2008-09 amounted to Rs 32.10 crore.

How long will the state continue to fund the loss making companies? It is public money that is being wasted. The chief minister should without wasting much time start the disinvestment process of loss making PSUs and earn some much needed bucks for the state. Fiscal consolidation to increase revenue can be achieved by increasing taxes and putting a competent system in place to collect it.

While reviewing J&K’s transition from sales tax to VAT, the CAG reports flaks the present system. There was increase in revenue growth after the implementation of VAT in the state, however, revenue per assessee decreased from 0.03 crore in 2004-05 to 0.02 crore in the post-VAT period.

The shortage of personnel coupled with the increased workload after the introduction of VAT was not addressed by the department, which affected the proper implementation, resulting in loss of Rs. 98.10 crore in penalty on unregistered dealers collecting tax and irregularly availing input tax credit of Rs 15.21 crore in five test-checked circles.
Not levying penalty for delayed submission of returns/audit reports resulted in short realization of government revenue amounting to Rs 4.39 crore. Non-verification of the correctness of opening stock declared by the dealer as on April 1, 2005 resulted in revenue loss of Rs 48.03 lakh, including interest and penalty. Prescribed registers/records were either not maintained or were not maintained in the prescribed form, in three out of 11 commercial tax circles test checked by the CAG.

The deputy commissioner (Audit) had failed to check even the minimum prescribed percentage of tax remission cases” the report says.

Due to non-functioning of weighbridges, assessment of additional toll in respect of the 17.12 lakh vehicles that crossed the toll post was made on lump-sum basis and not on the actual laden weight, leaving every scope for loss of revenue. Absence of a provision for cross verification of the toll post records of imports and exports of goods with Commercial Taxes Department resulted in non-levy of toll amounting to Rs 55.23 lakh. Allowing vehicles carrying load in excess of the permissible limit resulted in loss of Rs 15.14 lakh in toll collection, the report says.

The CAG report also mentions that there was delay in transfer of the toll receipts to the government account by the Jammu and Kashmir Bank Ltd. Timely deposit would have saved the government Rs 69.35 lakh as interest on the overdrafts. Lack of monitoring resulted in incorrect grant of exemption from payment of additional toll to the extent of Rs 4.58 crore to various industrial units.

The report, in short, is a shrill wake-up call for the state government to put its finances in order. Will it?

[Bilal Hussain is a journalist, and writer. In 2009 he attended the McGraw-Hill Personal Finance Reporting Program Courses, supported by The International Center for Journalists. He is associated with the premier English Daily, Kashmir Times. His principal interests are capital markets, developmental sector and ecological economics. He can be reached at ibilalhussain@gmail.com]