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Public Debt And Economic Subjugation

By Bilal Hussain

30 January, 2011

The much talked about agreement between the Jammu and Kashmir government and Reserve Bank of India has two dimensions to be analyzed through: One financial and other political aspect attached to the pact.

The Reserve Bank of India, Central Bank, entered into a supplementary agreement under Section 21A of the Reserve Bank of India Act, 1934 with the Jammu and Kashmir government to carry banking business of the state government. The agreement shall be effective from April 1, 2011. The RBI shall carry on the general banking business of the government of Jammu and Kashmir and act as the sole agent for investment of government’s funds.

It is being said that on the recommendation of the state government, the Reserve Bank of India has entered into an agreement with J&K Bank Ltd. whereby J&K Bank —state’s premier financial institution— would act as an agent of the Reserve Bank of India, for conduct of general banking business of the state government. Earlier, the operations were being transacted and managed through J&K Bank.

Financial aspect

Lets us understand what kind of financial repercussions the agreement would have on the Jammu and Kashmir: now onwards the Reserve Bank of India would grant advances which are repayable within stipulated time frame, thereby enabling the state government to bridge the temporary mismatches in its receipts and expenditures.

While, the existing system was the unique route available to J&K government only, as the JK Bank [JKB] used to provide comfortable position to the state to get overdraft and to bridge the mismatches on account of funds as it usually takes time for the state to receive funds from New Delhi on varied accounts.

At present J&K Bank provides an over draft of about Rs 2300 crores to the J&K government. The present move would put the state government in a tight financial position in the long run, as ours is a resource deficient sate, so revenue flow is too little to even serve debt.

Pertinently, as on March 31, 2010 the Jammu and Kashmir government has an outstanding public debt of Rs 25692.05 crores and outstanding Non Interest Bearing Debt as on March 31, 2008 Rs 2834.26 crores and outstanding NSSF loans as on March 31, 2009 was Rs 3158.90 crores.

More importantly the present pact was not something done hastily but it has started at the time the 13th finance commission has recommended conditional fiscal reform grant of Rs 1000 crore for Jammu and Kashmir against the request of the state government for providing it revenue gap grant of Rs 2300 crore to liquidate existing overdraft with Jammu and Kashmir Bank.

The commission's report was tabled by union finance minister Pranab Mukherjee in the Parliament on Feb 25, 2010. It has referred to the fiscal reform proposal of state government wherein it has pledged to invoke ways and means regime of Reserve Bank of India (RBI). For this, the state had requested commission to recommend revenue gap grant of Rs 2300 crore to liquidate existing overdraft with JKB.

From JKB side the agreement would mean an immediate short-run problem. The bank would be in pressing need to look for the means to deploy about Rs 2000 crores in one go. However, at the same time bearing it in mind that the JKB is private bank though having state's major stakeholder, is professionally run and should be capable enough to sail this tide.

The move could also mean outflow of government deposits from J&K bank in subsequent years that would be a real tough challenge for the bank to live without government support. I think the bank has to re-strategies now and think of a situation where the management has to foresee bank's financials minus government that would present a true picture of the bank.

To mention, as on September 30, 2010 the deposits of JK Bank were Rs 39687.93 crores and advance stood at Rs 23183.34, which would include government advances and deposits as well, which needs to be taken care of.

Political aspect

The other dimension to look at the agreement is that it would push the state towards ‘total dependence’ on New Delhi and is a kind of economic subjugation. The state now would have to frequently go to New Delhi with a begging bowl for petty finances as well.

The main opposition party, Peoples Democratic Party (PDP), of the state while reacting sharply on handing of the general banking business and conceding debt management of the state to RBI has said this is the latest and most lethal nail in the coffin of state’s autonomy by National Conference (NC).

According to the party president PDP, Mehbooba Mufti, “the decision is an enslaving mechanism for the state government that is already reeling under the economic deprivation and begging bowl syndrome caused by the sell out of resources by successive NC governments.”

“J&K Bank is not only a flagship financial institution of the state but it represents the ability of our professionals to script great success story” she said expressing her apprehensions that the new arrangement could be the first step towards its liquidation as a state owned company.

Lambasting NC for the move she said, chief minister of the state Omar Abdulaha seems to be dedicated to give up the remaining resources and feared that the banking changeover could prove a huge setback to the state in terms of achieving self sufficiency and economic self sufficiency.

Mehbooba said NC's political history can hardly boast anything by way of institution building, but J&K Bank was perhaps the only prime institution that professionals from the state developed and could be proud of. Not only would the viability and growth prospects of the bank be restricted by this decision, she said there was no doubt that state’s financial position would be massively compromised.

The RBI in its recently issued statement said that the Reserve Bank of India has already been acting as a debt manager to the government of Jammu & Kashmir pursuant to an agreement entered into with the state government under Section 21 A of the Reserve Bank of India Act, 1934, with effect from September 1, 1972.

However, contradicting its own statement, the Reserve Bank manages the public debt of the central and the state governments and also acts as a banker to them under the provisions of the Reserve Bank of India Act, 1934. While these functions become obligatory in the case of the central government (under the Sections 20 and 21), the Reserve Bank undertakes similar functions for the state governments by agreement with the government of the respective state (under Section 21 A). All state governments, with the exception of Jammu and Kashmir and Sikkim, had entered into agreements with the Reserve Bank for the purpose of both the aforesaid functions. These two states have agreements only for the limited purpose of the management of their public debt.

End Piece

The state is in a severe debt trap, the agreements like the recent one would mean further financial dependence. However, what is needed is reformative measures were by the state can at least bring down the public debt to a sustainable levels.

Few years back in one of my writeup I had suggested for setting of a Public Debt Management Office [PDMO] here where the public debt issues pertaining to state could be looked at. It could have meant setting of a separate debt management office which not only would ensure the management of public debt but would look at the acquiring low cost, less riskier debt, portfolio management of the state.

Debt management office would ensure low cost debt to state. This would at least bring down the present unsustainable debt level of the state. PDMO will generate internal sources of funds for state government, which would not only be cheaper but would be risk free as well.

[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]



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