March 2006 News

Highlights of the budget

6 March 2006
The Daily Excelsior
By Sanjeev Pargal

Jammu: Deputy Chief Minister Muzaffar Hussain Baig, Incharge Finance and Planning didn't impose any fresh taxes nor increased or reduced the existing taxes in his fourth successive zero deficit and revenue surplus budget worth Rs 14,436 crore presented in the Legislative Assembly today. Describing the budget as 'reform oriented' saying the Government's basic thrust for next three years would be on reforms after consolidation for first three years, Mr Baig said the State will have to go for privatisation of power to tackle increasing losses in transmission as well as revenue collection and said the Government was ready for 'political fallout' of the decision. He also announced reduction of Government share in Jammu and Kashmir Bank Ltd (JKBL) by 2.17 per cent from 53.17 per cent to 51 per cent. In his 103 minutes budget speech, the longest ever in the recent times, which was followed by a press briefing, attended among others by Economic Advisor Dr Haseeb Drabu and Finance Commissioner B B Vyas, the Finance Minister, who presented a separate budget for power, announced that Power Development Corporation (PDC) will go public over the next two years with Government diluting its equity to 51 per cent in a staggered manner, establishment of J&K Minority Development Corporation, setting up of a Committee to examine a plan to do away with pension for future Government employees after a cut off date and electronic payment system for contractors to avoid corruption. According to Mr Baig, J&K has become first State in India to present a separate power budget on the pattern of railway budget in the country. He announced purchase of nine to 10 lakh electronic meters this year. 'Neither any new tax has been imposed nor any tax increased or reduced. The budget is zero deficit', he remarked. With revenue expenditure for 2006-07 at Rs 9774 crore and receipts at Rs 12666 crore, the budget has become surplus by Rs 2892 crore. Leader of Opposition Abdul Rahim Rather, however, slammed the budget saying revenue expenditure has gone up from Rs 4900 crore when NC left the Government three years back to Rs 8600 crore-an increase of Rs 3700 crore. Expenditure of Rs 35,000 crore shown during last three years is not visible on the ground, he said, lamenting the budget carried no proposal to tackle unemployment. He charged that figures have been distorted to make it zero deficit budget. Asserting that Jammu and Kashmir can have its own plan of Rs 3300 crore but due to power deficit, which eats into the development works. 'We had suggested the Centre to finance separate power budget which has been done for next three years due to good office used by the Chief Minister. In three years, arrangements will be made to make J&K self-sufficient in power', he said, adding that the State has already taken up with the Centre the need to transfer Salal and Uri power projects to the State. After enforcing work culture in the State, Mr Baig, who presented maiden budget of Azad led coalition Government after having presented three budget as Finance Minister in the Mufti Government, kept a provision of Rs 250 crore for sanctioning Dearness Allowance (DA) to the employees as and when the DA installments are released by the Centre. This is for the first time that a provision for DA is being kept in the budget, he pointed out. In one of the major unexpected reform, the Finance Minister made intentions of the Government quite clear on privatisation of power. 'We propose Power Development Corporation (PDC) to go public over next two year by diluting equity of the State Government to 51 per cent. We will create what will be perhaps the largest hydro- power company in the country. It will give the PDC access to cheapest source of long term funds in the form of equity. On an estimate, we should be able to raise Rs 3,000 to Rs 5,000 crore in the primary market. These funds can be utilised to harness available hydel potential', he said, adding a J&K Power Finance Corporation can be setup to fund the money required by the PDC for its projects. The State Government can fix the budgetary support to 50 pc in initial years and gradually bring it down to just 20 pc. He hinted at giving financial, administrative and statutory powers to the PDC. 'Once this is done, formation of policy and overall control of the power sector will be vested in professional board of the PDC comprising a professional chairman and Chief Executive, a financial expert and two technical members with Power Secretary as Government nominee on the Board in addition to the chairman. Declaring that the Government was ready for 'political fallout' of privatisation of power, the Finance Minister observed that a requirement is gradually arising for privatisation to avoid pilferage and increase revenue. Asked whether privatisation will lead to increase in power tariff, he said there will be a Tariff Regulatory Commission to take a decision. He said it was due to the efforts of Chief Minister Ghulam Nabi Azad that the Centre has agreed to release Rs 1300 crore every year for power for the State. Mr Baig said the Government was also proposing to take up coal based power projects which can be completed in two to three years as against water based power projects which take six to 10 years for completion. Negotiations with the States, which have coal based projects like Bihar, are on, he added. In another bold decision, the Deputy Chief Minister hinted at bringing to an end the pension scheme in future appointments after an agreed cut-off date. 'As in the Centre, the State Government employees joining service after an agreed cut-off date in future would be asked to subscribe to the Contributory Pension Scheme. The move will help the States curtail its burgeoning pension liabilities', Mr Baig said, noting that 12 States have already switched over to new pattern while other States were also evaluating a similar option for their new employees. He proposed to set up a Committee which will submit its report within 6 months on the issue of new pension policy. The Committee will provide the State Government with recommendation on the proposed legislative, administration and policy framework of new pension scheme. Citing figures, Mr Baig cautioned that pension liability of the State will be more than the salary. He revealed that pension's combined liability of Rs 624 crore in 2003-04 has risen to Rs 760 crore in 2005-06- an increase of Rs 136 crore in two years. To help in rehabilitation and development of minorities, Mr Baig proposed to set up a J&K Minorities Development Corporation, which will promote employment opportunities in various trades-activities , promote entrepreneurship by sponsoring self-employment programmes in different trades and monitor sponsored schemes as well as economic schemes implemented under minorities welfare programmes. The Corporation will endeavour to develop the socio-economic conditions of the minorities with the help of National Minorities Development Finance Corporation. He announced reduction of Government share in Jammu and Kashmir Bank from 53.17 per cent to 51 per cent. This 2.17 per cent share will be given to the Bank employees. The Finance Minister disclosed that in 2006, overdrafts from the JKBL are likely to touch Rs 1500 crore. In 1997, the overdrafts were Rs 640 crore, in 1999 Rs 1000 crore, in 2002 Rs 1200 crore and in 2004 Rs 1400 crore. Every year, there has been an addition of Rs 200 crore to the level, he pointed out. Saying that he was not trying to justify ever rising overdrafts, Mr Baig, however, recalled that overdrafts were Rs 647 crore in 1996-97 when the total expenditure was about Rs 5000 crore, which meant that 13 per cent of the expenditure was financed through overdraft. 'In 2003-04, when we ended the year with an overdraft of Rs 1400 crore, the total expenditure was Rs 10,197 crore which indicated that 13.7 per cent of the expenditure was financed through overdraft. It is not just size of the overdraft alone, but its relation to the total expenditure that is important', he asserted. He said a lasting solution to the problem is to address structural weaknesses in the State Government's finances. 'While raising own revenues have to be the long-term objective, in short and medium-term, the only solution is to address the power problem. The overdraft levels are completely driven by power losses, he added. He noted that in a Memorandum of Understanding (MoU), signed between the JKBL and the Government in 1997, the limit for overdrafts on any given day is Rs 1500 crore. Taking a step ahead the Azad Government's drive against corruption, Mr Baig proposed to introduce a system of e-transfers for all transaction of the Government. He disclosed that money due to a contractor for executing a Government work will be transferred to his bank account in the form of an electronic payment system. 'All Government contracts that are tendered will be put on website so that all those interested will be able to participate. Intention of such measures is to reduce personal interface of people with Government and replace it by a impersonal system. To work out modalities of this, the Government will set up a working group in collaboration with the J&K Bank', he announced. The State annual plan outlay has gone up from Rs 4200 crore in 2005-06 to Rs 4348 crore in 2006-07. However, with transfer of a committed liability on account of salaries etc. of about Rs 400 crore from plan to non-plan, the effective size of plan went down to Rs 3948 crore. The State plan includes Rs 848 crore under PM's Re-construction Plan. The Asian Development Bank (ADB) assistance of Rs 200 crore is over and above this. The ADB money is in the form of 70 per cent ADB Fund and 30 per cent Counterpart Fund. The Centrally Sponsored Schemes (CSS) of Rs 700 crore is also over and above the plan of Rs 4348 crore. Non-plan revenue expenditure has also gone up by Rs 803 crore in Revenue Expenditure 2005-06. Police expenditure excluding salaries (Rs 737 crore), Interest Payments (Rs 1300 crore) and Power Purchase (Rs 1600) crore together accounted for 41.93 per cent of the total Revised Estimates of Rs 8675 crore. The State will spend an amount of Rs 3707 crore on Salaries and Pensions as per Revised Estimates 2005-06, which is 42.73 per cent of the total Revised Estimates for 2005-06. The balance expenditure of about Rs 1331 crore (15.34 per cent) represented all other activities of the Government including Social Security measures, maintenance of assets, electricity charges, power charges, drugs and other accessories for hospitals, grants for Universities, Local Bodies and other institutions besides administrative expenses. The power purchase outgo will exceed by Rs 300 crore. Mr Baig announced setting up of a new toll plaza at Lakhanpur to improve tax administration. This complex will be made functional round the clock. In another important decision , which, according to the Finance Minister, is being taken on explicit directions of the Chief Minister, the Government have hiked allocations for the district plans from 30 per cent to 40 per cent. Next year, it might be further enhanced, he indicated. According to him, the State projects are usually urban based though majority of population lived in rural areas. The Government also proposed to do away with the requirement for the District Development Commissioners (DDCs) to raise loan component of plan expenditure, which they rarely did. Now, the Finance Department will raise loans and the DDCs will get funds free of loans. 'Another initiative I am proposing is to transfer the committed liabilities of the previous plans to the non-plan side. To start with, this year I have transferred plan revenue expenditure of seven major departments to the non-plan side with resources. This is being done since almost 40 per cent of the plan is spent on salaries, telephone, patrol and travelling allowances. Plan expenditure is supposed to build physical assets and create capacities, not to defray current expenditures', Mr Baig observed. Seven Departments whose plan revenue expenditure is being transferred to non-plan side include Education (Secondary and Higher), Health and Medical Education, PDD, PWD, Irrigation and Flood Control, Tourism, Forest, Fisheries and Science and Technology excluding PM's Re-construction Plan. While liabilities of seven Departments worth Rs 459 crore have been transferred, the resources worth only Rs 400 crore have been transferred. 'Even before monitoring, we have made a saving of Rs 59 crore including 'Maintenance', which will be introduced as a separate head with a provision of Rs 150 crore. As per the budget estimates, the J&K's own tax revenues are being projected to grow at stiff rate of 26 per cent over last year to reach a level of Rs 2000 crore (inclusive of Additional Resources Mobilisation) in 2006-07. Compared to the revised estimates, it is an increase of only 18 per cent. Non-tax revenues have been estimated at Rs 820 crore. Non-plan expenditure during 2006-07 is estimated to be Rs 9,488 crore of which Rs 8,857 crore is on the revenue account, which represented a two per cent increase over the previous year. 'During the last three years, I have made it a point not to increase non-plan revenue expenditure and I continue to do so which enabled me to spend more on developmental works', Mr Baig said. He predicted the next year's salary bill at Rs 3164 crore in view of recruitment process having been set in motion as against Rs 2992 crore for 2005-06-an increase of Rs 172 crore. Ten per cent devolution of the aggregate revenue collection under VAT will be given to the Municipal Corporations and Urban Local Bodies. The distribution will be based on the population ratio. Mr Baig said the non-plan revenue account deficit has risen from Rs 1142 crore to Rs 1522 crore in 2006-07. 'Even with this level of non-plan revenue deficit, the overall revenue surplus jumps to Rs 2892 crore compared to Rs 1692 crore in 2005-06. As such, the fiscal deficit is estimated to the tune of Rs 1337 crore, which is about Rs 500 crore lower than what it was in 2005-06. He announced that sick and semi-sick Public Sector Enterprises (PSEs), which are not viable, will be closed down. The policy of providing budgetary support to loss making PSEs on 10 per cent diminishing scale every year will be continued. An amount of Rs 10 crore will be provisioned every year in the budget to serve as reserve for taking measures to downsizing of PSEs that are functional and potentially viable. The Planning and Development Department shall also provide an amount of Rs 10 crore every year from the State plan for financial and technical restructuring of PSEs. The employees of PSUs, whose viability is under question, will be given golden handshake scheme. The Finance Minister said the Housing and urban Development Department will finalise a specific policy for development of malls and multiplexes. Entertainment tax exemption shall be extended to all cinema halls located in such multiplexes for a period of 10 years, he announced. The State, he added, has collected Rs 900 crore under the VAT till the end of January 2006 as compared to last year's commercial receipts of Rs 804 crore. This year, the Department expects collection to end up at around Rs 1100 crore-an increase of 37 per cent over the last year. 'Three years back, the revenue from this source was not even Rs 500 crore. In three years, the receipts have been doubled. However, this good work is being negated by the absymal performance of power receipts, which were budgeted to be Rs 632 crore. However, we will fall short of target by Rs 101 crore. Such a large hit on account of one item of revenue distorts the entire revenue performance in general and non-tax revenue collections in particular. The non-tax revenues for 2005-06 have now been revised downward by Rs 93 crore to Rs 727 crore as against the budgeted figure of Rs 820 crore. The aggregate non-plan expenditure for 2005-06 was budgeted at Rs 8395 crores but has now been revised to Rs 9157 crore. While expenditure on revenue account will increase from Rs 7871 crore to Rs 8675 crore, an increase of Rs 804 crore, the expenditure on capital account will be up by Rs 606 crore to Rs 3871 crore in the revised estimates. According to him, the increase in expenditure is mainly on account of two items- purchase of power, estimated at Rs 1300 crore or may surge to about Rs 1600 crore an increase of Rs 300 crore over the estimated and secondly on account of October 8 earthquake. 'The expenditure on restoration of utilities and providing relief to earthquake victims has been substantial. In the current year, the expenditure that the State has already incurred is about Rs 400 crore. The Central Government has announced an assistance of Rs 642 crore, of which only Rs 300 crore have been received so far. The State has now sent a memorandum for an estimated Central assistance of Rs 1342 crore for earthquake losses', Mr Baig said, adding due to this as well as snow tsunami rehabilitation, the non-plan revenue deficit has increased from projected level of Rs 878 crore to Rs 1142 crore in revised estimates for 2005-06. According to the budget, the per capita income at current prices for 2004-05 is estimated at Rs 16,190, an increase of 5.7 per cent over the previous year. This level of per capita income is lower than the all India level of Rs 23,241. The Gross State Domestic Product (GSDP), which is the total income of the economy, has seen a sharp turnaround in the last three years. The GSDP at current prices for 2004-05 is estimated to be Rs 20,877 crore, which represented an increase of 8.87 per cent over the previous year. In the current fiscal, 2005-06, advance estimates indicate a 10 per cent increase over last year. This amounts to a growth of 5.7 per cent, given that the inflation is 4.3 per cent. Pointing out that national economy is growing at 8 per cent for last three years, he said that J&K economy has registered a much higher growth earlier. However, the most significant aspect of this growth is its stability. He said growth has slightly slackened during 2004- 05 in industrial sector while agriculture has shown a modest recovery. However, he added that manufacturing growth is poised to look up in the coming years with concerns over VAT having been met. 'During last three years, the State Government has cumulatively spent Rs 35,000 crore of which about one third has been on investment', the Deputy Chief Minister disclosed. On economic reforms, he said the reform programme includes macro-economic stabilisation, reduction in scope of administered prices, privatisation of public owned enterprises, financial sector reforms, social safety nets, promotion of exports, elimination of quantitative import restrictions, a shift to tariff protection and reduction in average tariff levels. The Government will also work on a three-pronged strategy for promoting domestic and Foreign Direct Investment. He said within the broader framework of the announced industrial policy, separate sub-policy packages will be worked out for the Kashmir valley and some backward districts of the State that have special geographical and infrastructural constraints and required special remedial measures. On trade policy, the Finance Minister said, the Government wants to pioneer the concept of 'New North'. This will not be based just on tax, tariffs and trade promotion alone but on exploiting the potential of efficiency seeking restructuring of industry on a northern regions basis, he added. He maintained that this would have income and efficiency effects and hence could be valuable drivers of growth. He said a provision has been made for completion of all ongoing works, costing upto Rs one crore. In last year's budget special, a similar provision was made for the completion of all ongoing works costing upto Rs 50 lakh. Under this programme, 1600 such works were completed last year. In power budget, Mr Baig observed that a three to five year strategy has to be put in place to make power sector financially independent. 'Assuming that we were to meet entire demand for power, the financial implications would be staggering. The purchase of power alone would on current rates be in the range of Rs 2300 crore. Add to this, the salaries of Rs 250 crore, PDC's expenditure of Rs 96 crore, O&M spending of Rs 103 crore, depreciation allowance of Rs 86 crore and Rs 20 crore for interest, we will have an estimated power bill of Rs 2855 crore per annum. With recoveries just Rs 500 crore, the net loss will be Rs 2355 crore, which is more than the State's own revenues of Rs 1900 crore', the Finance Minister said explaining the grim electricity scenario in his budget speech. He went on 'after providing for physical stoppage-curtailment of power supply-the gap is reduced to 2535 MUs. After curtailment, the financial implication of restricted power supply is Rs 2015 crore'. Mr Baig said Rs 1300 crore power reform grant by the Centre will continue for next three years during which the State is expected to initiate power reforms and have a credible plan of action. 'We have to execute a tripartite memorandum of understanding with the Planning Commission and the Ministry of Finance during the course of this year', he said. 'For every unit of power that we purchase, the transmission and distribution losses are 47 per cent. As if this wasn't enough, for every unit that we sell, we lose 44 per cent. This is so because the average sale price is 1.35 paise and the average purchase 2.26. The loss on every unit of power sold is 44 per cent', the Finance Minister said. He said he was starting the process by providing Rs 1500 crore for power purchase in addition to other associate expenditure like salaries, operation and maintenance. 'The Government expected receipts to increase by Rs 100 crore at a level of Rs 600 crore. The power deficit of Rs 1300 crore will be met from the special Central assistance of Rs 1000 crore from the Ministry of Finance and Rs 300 crore special plan assistance from the Planning Commission', he added. Mr Baig unveiled a brief agenda of reform measures for next three years to save the State exchequer from financial ruin. 'The State will provide open access to transmission system by Independent Power Producers and Licensees including electricity traders. A state transmission utility will be established. A long term transmission plan for 15 years or more will be developed for the State in consultation with CEA and Powergrid', he elaborated. On distribution front, he said the distribution regions-circles based on suitable criteria will be formed. 'Currently, the metering is about 10 per cent and recovery only 18 per cent of the cost of supply. While the cost of supply is Rs 41.12-kwh, the average tariff charged to customers is only Rs 1.37-kwh. The PDD, therefore, has a return on capital of 75.48 per cent. Metering will be made mandatory within a limited time period to correctly identify leakages in the system. Billing and collection have to be improved substantially', he added. The State Government, Mr Baig told the House, is also trying to take a share in ONGC projects and 300 mw Jindal Power Project, Chattisgarh in thermal and 750 mw West Seti Hydro Project, Nepal in Large Reservoir Based Hydro. 'Unlike most of the hydro power generators, currently available to us, the West Seti Hydro Electric Project had a large storage reservoir with a capacity of one month water requirement. This reservoir enables the project to provide a peaking facility of about 8 hours a day including during low flow winter months. Therefore, this project is well suited to J&K's load profile', he said. The Finance Minister cautioned 'if we don't present a comprehensive and workable power plan, we will all be without power-literally and metaphorically. This is a honest assessment'. Highlights of the budget No new taxes, no hike or reduction in any existing tax * Fourth successive zero deficit budget * FM says the budget is reform oriented *Annual plan up from Rs 4200 cr to Rs 4348 cr * Rs 2892-cr revenue surplus budget *Plan for districts up from 30 pc to 40 pc *Tax revenues projected to grow at 26 pc *Non plan expenditure to be Rs 9488 cr *Sick, semi-sick PSEs to be closed down *Employees to get golden hand shake *Coal based power projects proposed *Development of Malls and Multiplexes *Ten year tax exemption to cinema halls in Multiplexes *Per capita income in J&K Rs 16,190 *Rs 35,000 cr spent in last 3 years *New toll plaza to be set up at Lakhanpur *Rs 250 cr reserved for DA to employees *Pension scheme may go after cut-off date recruitment *Govt share in JKBL to be reduced by 2.17 pc *Minorities Development Corporation proposed *Overdrafts from JKBL to be Rs 1500 cr in 2006 *Contractors to get payment in bank accounts *Power revenue collections down by Rs 101 cr.


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