ZT Economic Analysis Team

A probable downward revision of J&K’s GSDP and annual growth rate figures could mean that the assumptions underpinning the state’s borrowing have been faulty. In other words, with lesser economic activity than actually calculated and higher borrowing and lesser repayment capacity, J&K might well have landed in a somewhat undesirable situation.

In 2015, when the government of India adopted a new method for the calculation of the Gross Domestic Product (GDP) in the country, it was a foregone conclusion that GDP growth rates as we have seen them would undergo a downward revision. The change involved bringing forward of the base year used for calculations to 2011-12 from the previous 2004-05, besides other methodological changes.  

These methodological changes have translated into a downward revision of Gross State Domestic Product (GSDP) figures and annual growth rates for most of the states. But what about Jammu & Kashmir?

Ziraat Times’ weeks of engagement with the Economics and Statistics Department of Jammu & Kashmir government reveals that the revision process for the state is on. But as of now the state’s departments responsible for calculating its GSDP do not know with certainty how much revision would actually happen.

A comparative analysis done by Ziraat Times reveals that most of the states in the country have undergone a downward revision – meaning that the annual economic growth rate calculated previously actually turned out to be lesser than the reported one.

According to Reserve Bank of India (RBI) data, J&K is one of the four states in the country whose fiscal deficit has crossed the 3.5% conditional limit in relation to its GSDP. J&K’s fiscal deficit was actually 4.9% of the GSDP in 2018-19. Still worse, RBI data accessed by Ziraat Times indicates that Jammu and Kashmir is also estimated to have the highest liabilities in the country at 50% of its GSDP, followed by Punjab at 41%. 

Ziraat Times set out to address the following questions about this whole question.

1. What are the key changes affected to the GSDP calculation methodology for J&K? Does the Economics and Statistics Department have the requisite data for the back series and other indicators readily available in J&K? How credible is that data?

2. What is the impact on the revised methodology of calculating GSDP on Jammu & Kashmir’s latest and past GSDP figures (last 10 years)? 

3. Would this situation impact J&K’s capacity to repay its public debts (considering that the state’s actual repayment capacity would be lower because of its actually lower GSDP)

Our teams spoke to several stakeholders – politicians to economic experts to business leaders and academicians. Interestingly, few people were inclined to comment on the matter or had knowledge of the subject.

Consequently, a wider analysis of the matter could not be undertaken. However, Ziraat Times is closely following this matter with the Department of Economics and Statistics and we intend to produce more detailed analyses on the subject in the coming days.

How does J&K State fare compared to other states?

A Live Mint analysis of the aggregate GSDP of states for the years for which the common data is available for both the old and the new series (FY12-FY14) shows that several states saw huge swings in fortunes after the introduction of the new series.

Among the 20 major state economies, Bihar and West Bengal saw their economies shrink even as others expanded. The increase was, however, far from uniform with several poorer states such as Madhya Pradesh, Rajasthan and Odisha losing out from this change. The big exceptions in this list were Jharkhand and Assam, which saw a sizeable increase in their state economies.

Most of the relatively prosperous states such as Delhi, Kerala and Karnataka saw a further boost to their GSDP numbers when the new figures were published. Haryana, Gujarat and Punjab were the exceptions among the prosperous states as they saw only a small increase in the size of their economies.

The biggest contrast was between Andhra Pradesh (whose GSDP barely moved up) and Telangana (which saw a big jump in GSDP). Although this is partly owing to the loss of Andhra’s capital and economic hub, Hyderabad, to Telangana, the new methodology may also have played a role. 

 Some of the gainers of this windfall were quick to realize what it meant for their borrowing limits. Under the Fiscal Responsibility and Budget Management Act (FRBM), states are supposed to limit their borrowing to 3% of GSDP. But when the GSDP is inflated, states can spend more in absolute terms without breaching that limit.

Poorer states, however, were hit hard as they had to crimp spending to meet their deficit targets. 

“The change to the new GSDP series has led to a harder budget constraint compared to earlier for poorer states such as Bihar and Madhya Pradesh,” observes Ravindra H. Dholakia, an Ahmedabad-based economist and member of the monetary policy committee of the Reserve Bank of India. Dholakia was the first to warn about the problems in the new GSDP numbers in a 2017 research paper co-authored with Manish Pandya of the Gujarat Directorate of Economics and Statistics. 

This GSDP revision has another implication: that is the Finance Commission awards to states like Jammu & Kashmir. 

How the devolution of funds by the FC would affect different states also depends on the formula that is being used. If greater weight is given to fiscal performance, poorer states would be penalized. On the flip side, if poverty or the ‘income distance’ metric (which measures the difference between the per capita GSDP of a state and the per capita GSDP of the state with the highest per capita income) receives a higher weight, poorer states could benefit.