We must first try and get fiscal autonomy: Haseeb Drabu

Nobody perhaps knows Kashmir's economy better than  Haseeb Drabu, ex chairman of  J&K Bank(2005-10) and an economic advisor to the state government (2004-09). He spoke to Sreenivasan Jain in Mumbai on the blueprint for Kashmir's economic autonomy.

Mumbai:
Sreenivasan Jain: As the head of the J&K Bank you've had the experience of dealing with the economy of Kashmir first-hand. What is the overall state of affairs? Because the perception is that the entire economy is largely dependent on the Centre, that it is a state largely subsidized by central funds. How true is that and is it possible for Kashmir to ever break out of that?
 
Haseeb Drabu: Let's make a distinction here. There's the economy of J&K and there is the Government of J&K. The Government of J&K is completely dependent on the Government of India. The economy of J&K is not dependent at all on the economy of India, or on the Government of India, except, of course, that there are trade relations. There is normal transactional business. Fruit is exported. There are also imports from the rest of the country.
 
Sreenivasan Jain: Explain that anomaly, because in other states the revenues raised through the economy of the state is what funds the government, its activities, salaries and so on. Why is there an anomaly in J&K?


 
Haseeb Drabu: For a variety of reasons. If you take a larger political economy perspective, then there is a fostered dependence, which has been created in the system over the years. So the government was not obliged to raise resources to fund itself. This is the best way to keep a government in control.
 
Sreenivasan Jain: Keep it dependent, on the umbilical cord.
 
Haseeb Drabu: Yes. I have said it in many of my writings that these are precisely the chains that Nehru spoke of when he referred to the chains of gold. Nehru once famously said in Parliament that "I'll bind Kashmiris in chains of gold." Secondly, and more substantively, a large part of the Kashmir economy, not the political economy but the pure economy, comes from exports, and exports are rarely taxed. You shouldn't tax exports. In fact, when I was with the Government of J&K, where I was for 4 years, we abolished all of them, because you don't really tax exports. Third is that a large, substantial part comes from agriculture, which is again non-taxable. Then the largest piece in this whole thing is the service economy. Tourism, trade, that kind of an economy. The Indian taxation system, apart from the service tax machine which has now come up, was commodity oriented. We are not a producing state, we're a consuming state. So we do generate sales tax but beyond that we do not have a robust tax base. But even then the tax to SDP ratio of J&K is very close to that of Karnataka and other middle income states. It is 7 and a half per cent. The issue really is...
 
Sreenivasan Jain: So you are raising that much tax even with your limited sectors and limited resources. You have a healthy tax to GDP ratio.
 
Haseeb Drabu: Exactly. The issue really is of two things. One is high government expenditure.
 
Sreenivasan Jain: Now give me that break up, because that's a very interesting break up. If, for example, you have a budget of 20,000 crore, a very large percentage of that is just consumed by the government.
 
Haseeb Drabu: Salaries. The salary bill of the Government of J&K must be the highest in the country.
 
Sreenivasan Jain: Ballpark of about 8,000 crore?
 
Haseeb Drabu: 10,000 to 11,000 crore.
 
Sreenivasan Jain: Even more? 10 to 11?
 
Haseeb Drabu: And then there are interest payments and pensions. If you account for that then there is nothing left.
 
Sreenivasan Jain: Interest payments must be another 2,000 to 3,000 crore? Pensions maybe another 1,000 crore or more?
 
Haseeb Drabu: Yes, maybe even more. Now the figure will be even higher after the pay commission hike. It's really a problem of primary government expenditure, because traditionally speaking there has not been the kind of employment generation that you'd like. There is artisanal employment, which, unfortunately, nobody is trying to track. Policymakers are very fascinated with industrial employment. So you don't have that level of employment and hence government becomes the employer of last resort.
 
Sreenivasan Jain: It is the biggest employer
 
Haseeb Drabu: It is certainly the biggest employer and is also the employer of last resort. Governments necessarily have to do this because there is no other option available. So they become the employer of the last resort. Then they have to pay commissions. They also have to be the model employer and so can't pay less. Both these factors combine together to cause a huge growth in the salary bill, which pre-empts resources from development expenditure.
 
Sreenivasan Jain: So how do you break out of this? If you feel that the government should take the lead, then, having been the economic advisor as well as the chairman of J&K Bank, you have had the opportunity to try and fix things. Were you able to do anything at all or at least move things in a certain direction?
 
Haseeb Drabu: Well, certainly not on the government expenditure front. The issue is that you're also looking at a phase. I was there for 3 to 4 years as the economic advisor. Certainly as the chairman of J&K Bank I tried to do things outside the government, to generate more employment in the system through unconventional means. But from government policy perspective it is very difficult to treat it as a normal economy when you're coming out of a 25 year old civil strife. You need something like a reconstruction plan, and I had drafted the one which Dr. Manmohan Singh announced in 2006. I think that that was the key. And there again, though a part of it did work, it was subject to the typical Indian bureaucratic hype. If I remember correctly it was the state government that had drafted this plan.
 
Sreenivasan Jain: It was a Rs 24,000 crore plan.
 
Haseeb Drabu: That's the point Vasu.
 
Sreenivasan Jain: It was announced as a Rs 24,000 crore plan.
 
Haseeb Drabu: I went to Delhi. I remember very clearly that we had full discussions. The total amount we had asked was Rs 6,000 crore. One has to remember that it's not just about getting money. We must also create the absorptive capacity to be able to spend it well. So we phased it. When the PM came and announced it, I was sitting in the audience. I still remember that Sanjay Baru was the media advisor. When the PM announced the Rs 24,000 crore figure I rushed to him and asked him if there been a mistake? He said no, that 24,000 crore was in fact correct. When you look at it you see that a huge fraud was perpetuated. Rs 18,000 crore was given to the power sector at the Centre. NHPC got the money.
 
Sreenivasan Jain: None of the money was coming to the state?
 
Haseeb Drabu: No, it still hasn't come. The 6,000 crore were spent well.  You can see the roads and infrastructure buildings that were built as a result of it. But that the game that was played, and that too by someone like Dr. Manmohan Singh, was very strange and surprising. We had agreed on Rs 6,000 crore, which was suddenly hyped up to Rs 18,000 crore for no reason. The state got nothing out of it. Even now it will go to NHPC and not to J&K. This is how things function.
 
Sreenivasan Jain: Now let me flip this around and put this to you from a political perspective. When there is talk of autonomy for Kashmir, whatever shade of autonomy one looks at, whether it's the NC formula or the PDP formula or what the Separatists want, essentially you can't have political economy until you have some sort of economic autonomy. You were saying that Kashmir, at the moment, is bound by chains of gold. How do you even begin to move towards economic autonomy if you are so umblically linked?
 
Haseeb Drabu: I think the biggest contribution made by me as Economic Advisor was the commitment included in Mr. Muzaffar Baig's first budget and the Governor's speech that we will move towards fiscal autonomy prior to political autonomy. It is there on record, you can check the Governor's speech.
 
Sreenivasan Jain: The PDP government with Mufti Mohammad Sayeed.
 
Drabu: That's right, Muzaffar Baig was the then Finance Minister and the Governor's speech said this. We must first try and get fiscal autonomy because political autonomy without fiscal autonomy is not possible. In fact, if you look at the history of devolution, the only critical piece missing was finance. Finance was the only topic not addressed in the famous 1951 Accord signed by Nehru and Sheikh Abdullah. It was only signed after Sheikh Abdullah was removed in 1956. So the key is finance, once you resolve that...
 
Sreenivasan Jain: So how do you envisage that? The Governor mentioned it in his speech, the government said it but how...
 
Haseeb Drabu: The idea is to create capacities in the system first.
 
Sreenivasan Jain: Meaning?
 
Haseeb Drabu: In terms of developmental capacities. I don't think Kashmir has an unemployment problem at all as is being propagated.
 
Sreenivasan Jain: That's an extraordinary statement because unemployment is seen as critical to the problem.
 
Haseeb Drabu: Not only that. People vulgarise the issue by saying that the militancy is related to unemployment, which is ridiculous. Now the Army generals are saying that people are throwing stones because they can't play cricket. You can't get more vulgar than that. Having said that, there are 3 lakh 75 thousand small enterprises in J&K, which employ around 7 lakh people. These are mom and pop shows. One enterprise employs two people.
 
Sreenivasan Jain: This includes Jammu and the valley?
 
Haseeb Drabu: This estimate is from the Government of India census. These enterprises do not receive any subsidies; they're not on any government dole. They have survived the militancy. They will survive a nuclear holocaust. They are all family run enterprises. All you need to do is to give them technological intervention and marketing facilities. If you increase the scale from two members to four members, you have 14 lakh jobs. Do this with 3, and you have 20 lakh jobs the very next day. So we started becoming creative and decided to look at the artisanal sector.
 
Sreenivasan Jain: Did you do that?
 
Haseeb Drabu: Yes. During my stint at the J&K Bank the amount of credit in J&K more than doubled and the credit deposit ratio changed from 30% to 60%. It's on record. So there is a way to do that. Once you do that, then you could create a parallel structure for taxation. Secondly, it is essential to get people to pay for services. Power is the biggest one. Everybody talks about the power deficit in J&K but mentions the fact that the power deficit is created because people don't pay for power. The power sector faces an annual deficit of Rs 2,000 crore.
 
Sreenivasan Jain: Which is not unique to J&K, but the figure is perhaps much higher.
 
Haseeb Drabu: If your transmission and distributions loss is 70%, then you are in a different league as the national average is 20%.
 
Sreenivasan Jain: So your transmission and distribution losses are 60%?
 
Haseeb Drabu: Yes, and that is where the entire focus of the reforms should lie - on distribution, generation, and so on and so forth. The annual loss of Rs 2,000 crore must now be closer to Rs 2,500 crore.
 
Haseeb Drabu: Yes, we got a power reform grant from the Government of J&K and the Government of India saying that we'll move towards a system where we'll neutralise the place. There was a proper plan
 
Sreenivasan Jain: What happened to that?
 
Haseeb Drabu: A number of things happened to that. All meters were taken out from the areas that were victimised during the period of stone throwing. A lot of administrative stringencies are required. But if you supply only six hours of power a day then you have no moral, ethical or administrative right to ask for bookings . So the first step was to provide power for twenty-four hours. You can ask for power bookings if you do that. You lose more money when you supply power around the clock, so there is a required build up period, which, I think, J&K couldn't afford. So the moot point is that you can only recover user charges once you do that.
 
Sreenivasan Jain: But the CM argues that all the power that is supplied to us is coming from central utilities and has to be bought at a very high cost. The CM argues that J&K is not allowed to generate power for itself, to create a power building capacity. Is that a legitimate argument?
 
Haseeb Drabu: In a manner of speaking, yes. There is a history to it and that needs to be understood. Why wasn't power generated? What is the reason for it? And when the state government has done things it's been extraordinarily expensive. Baglihar, for instance, has been extraordinarily expensive. It costs Rs 13 crore per megawatt when the norm is Rs 6 crore. But still, Baglihar is a saviour today. There is no doubt about that. Six major power plants were given to Delhi in 1996. Why were they given?
 
Sreenivasan Jain: The logic apparently was that they were given to the Centre since the state couldn't afford them.
 
Haseeb Drabu: So the best way would have been to do a joint venture, which is being done now. I had conceptualised the idea and had created a separate company. Jairam Ramesh was the Minister of Power at that time. We signed a MoU wherein the Government of J&K and the Government of India had a 49% stake each, and the J&K Bank had the remaining 2%. Eventually the Government of India ended up with 51%. However, we created a separate company called Chenab Valley Power Projects. That has now been capitalised, the company is now being formed in such a manner that if you own half the company, you get half the revenue.
 
Sreenivasan Jain: So it should have been done through the JV route instead of just being handed over to the central utilities.
 
Haseeb Drabu: Absolutely. Then the government can divest in a staggered manner and earn some money. This can be invested in other avenues. It is also necessary to change the mix. Today we're overly dependent on hydropower. As a result, enough power is not generated during the winter months. We must trade some hydro capacity with thermal capacity elsewhere.
 
Sreenivasan Jain: Right, because you don't have thermal capacity yourself.
 
Haseeb Drabu: People want hydro. We must get into the marketing of carbon footprints and generate resources. The moot point is that we need active fiscal and policy management in the state, and this needs to be done creatively.
 
Sreenivasan Jain: And which is possible despite the history of conflict. It is not enough for the governments or chief ministers to hide behind the conflict and say that look we can't do anything as there is an upheaval every six months.
 
Haseeb Drabu: No. But I would grant that it was very difficult to get anything substantial done between 1990 and 2000.
 
Sreenivasan Jain: But that is not a valid excuse now...
 
Haseeb Drabu: From 2000 onwards, certainly not. Things have improved substantially since then and things have now normalized to a great extent.
 
Sreenivasan Jain: So your proposal for economic autonomy has two main features. One is to regenerate the artisanal and small enterprise sector. The second relates to power reforms and increasing the power capacity, which can also become a big revenue earner because the state has tremendous hydel capacity which is untapped at the moment. Do you have any other suggestions? For instance, how about agriculture?
 
Haseeb Drabu: Basically the entire argument revolved around the crafts economy. If a piece of Belgian lace can sell for $100 why are you selling Shahtoosh for Rs 35,000? For God's sake, it takes one year for the guy to reap that stuff! It is not patented, it is not noted down. We need to build a high value added crafts segment. We need to generate high tourist economies which can in some ways to developing crops and doing this kinds of things. So it's not that the economy is not sustainable. On the contrary it is very sustainable. We need to internalise the kind of structures we have. Horticulture is a great opportunity. Today it contributes more than what industry contributes.
 
Sreenivasan Jain: To the state's GDP?
 
Haseeb Drabu: Yes and the J&K economy survived the militancy largely because of two products - apples and shawls.
 
Sreenivasan Jain: So why not re-invest in these? Why not expand and professionalise them?
 
Haseeb Drabu: Yes, we must take them to a different level. As I said, we could still do a wonderful thing by raising this level. These sectors are characterized by dispersed employment. What they need is a proper, long term plan. It can't be done over night. But we must build towards it.
 
Sreenivasan Jain: And wean yourself away from this dependence on Delhi. At least more than that is there currently.
 
Haseeb Drabu: No question about it. A large part of this dependence, as I said, is fostered. There's no question about that. Look at the North East...
 
Sreenivasan Jain: All the special category states...
 
Haseeb Drabu: If you go back to the question of political economy. What does the Government of India have in the Constitution, other than the controversial Article 356, that is applicable to J&K? How will it hold the state government together? The only thing that holds it is the purse. The purse is the control. The moment you don't agree to what they're doing, you withdraw.
 
Sreenivasan Jain: You said that the manufacturing-industrial route is not the most applicable to J&K. But is that route also an option which needs to be explored? Especially given that you don't see the big national players coming in. You don't see a Reliance, a Wipro or an Infosys. Is it possible to try and make local entrepreneurs more active? In manufacturing and small industry perhaps?
 
Haseeb Drabu: That's one of the major steps that I was trying to take in the Bank. We tried very hard, like everybody else, to get the Birlas and the Ambanis and the Infosys of the world to come and do something here.
 
Sreenivasan Jain: What happened?
 
Haseeb Drabu: Nothing. Whatever you may say, Kashmir doesn't convey the impression of being there forever. It is not a stable power and is internationally disputed. You will still see economies with maps which raise a huge stake.
 
Sreenivasan Jain: But they still go to Chhattisgarh. They still go to Naxal affected states.
 
Haseeb Drabu: Well Chhattisgarh may be a conflict area but it is not a disputed area. Plus infrastructurally, of course, J&K doesn't qualify. There are no long rail routes, for example. The small industrial sector is still is vibrant and there is scope for growth. You will see the presence of local entrepreneurs, because they have a stake in the system. We did a single piece lending of Rs 100 crore to finance a cement plant, which is doing very well. A Rs 60 crore power plant is also doing very well. The best part about this, and one in which I take a lot of personal pride and delight, is that these are all youngsters. Take, for example, the gentlemen who set up the power plant. His father was a contractor in Salal. He went abroad for his education, came back, set up the plant and is doing a fabulous job of it. The J&K Bank funded him and he is doing very well.
 
Sreenivasan Jain: So you're talking about cement, you're talking about power...
 
Haseeb Drabu: Pharmaceuticals. A lot of pharmaceutical units are now here. There is mineral water as well. You could conceivably create an Evian in J&K as Evian is not too different from the water that you get in Kashmir. Let me tell you about this thing we have here called Poshish tweed. It is government priced. You can go and check, it will show in your VOs also.
 
Sreenivasan Jain: The world famous Harris tweed and the Kashmiri Poshish tweed...
 
Haseeb Drabu: It's exactly the same. It's woven on the same looms. It's done in four localities in Srinagar.
 
Sreenivasan Jain: But again it is invisible, nobody knows about it.
 
Haseeb Drabu: It's invisible. It sells for Rs 200 per meter in Delhi's Lajpat Nagar while Harris sells for Rs 8,000 per meter. I tried doing a tie up with Reid & Taylor and 800 meters were sold at a fabulously fancy price. We need good packaging, good innovation.
 
Sreenivasan Jain: Is it also possible to have a new generation of Kashmiri entrepreneurs involved in manufacturing and in some kinds of industrial activities? Do such activities need not be limited to bigger states?
 
Haseeb Drabu: Of course. But such activities must be environmentally friendly and ecologically balanced.
 
Sreenivasan Jain: Haseeb, what happened with you? You were summarily removed, or at least that was the perception, when there was a change of regime. As you were saying, J&K Bank was going great guns, things were going well.  What happened?
 
Haseeb Drabu: No. I don't think it was about the change of regime because I have served the current regime for longer than I have served any other regime. I worked as the Chairman of J&K Bank for a year under Mufti Mohammad Sayeed and for a year and a half under Mr. Azad. And I think I worked for 2 years under Mr. Omar Abdullah.
 
Sreenivasan Jain: So what happened then? You still don't have any answer?
 
Haseeb Drabu: No, didn't ask. I don't know.
 
Sreenivasan Jain: But do you think it had anything to do with the fact that you were trying to change the nature and the culture of J&K Bank. J&K Bank had a legacy of being used and abused. There is a history of political intervention...
 
Haseeb Drabu: I don't think so. In fact I have complimented the Government of J&K, not just this one but earlier ones as well, for having steered clear of J&K Bank. There was no political intervention of sorts. It wasn't really abused.
 
Sreenivasan Jain: Not in your time.
 
Haseeb Drabu: Not even earlier. It wasn't politically abused and was given lot of autonomy. It was doing very well and is still doing very well. It's one of the best institutions of J&K. I guess I didn't ask and I wasn't told.
 
Sreenivasan Jain: Were you surprised though?
 
Haseeb Drabu: Yes, I was surprised.
 
Sreenivasan Jain: Upset, hurt?
 
Haseeb Drabu: Not upset, certainly not. I was told at 11 in the morning. By 12 I submitted my resignation and by 1 I had moved out.
 
Sreenivasan Jain: In conclusion, along the lines of what you have said, would you say that in terms of trying to create a different type of economic blueprint in office in J&K, it is possible to achieve economic autonomy? That it is not entirely a pipe dream and that it is possible to build from there towards political autonomy?
 
Haseeb Drabu: No doubt. There is not a shred of doubt in my mind. Not just Kashmir, but any economy in the world is sustainable. You should read your father's writings on it if you want to convince yourself of this after looking at your own economic structures. He was somebody who'd propagate this.
 
Sreenivasan Jain: On the point of Kashmir, you're saying it's possible. The only reason I am pushing you on this point is that because those who comment on political autonomy, whether in the mainstream or amongst the separatists, don't talk about economic autonomy at all. They don't even seem to have a clear idea of how to achieve that.
 
Haseeb Drabu: Yes, but that's a bit tragic because it gets defined as a political problem. Yes it is a political problem, but prior to facing the political problem you need to resolve the economic situation as well. And I think the agenda I was trying to set up was, reform the government and reconstruct the economy before you get into the politics. That was the single line. In fact, it was something that I even wrote about in the PM's reconstruction plan. I stated that there was an urgent need to reform the government and reconstruct the economy. 
 
Sreenivasan Jain: You said that it is wrong to make a correlation between unemployment and stone-pelters, but will this also address that? And why would you not make that correlation? It is generally understood that if you have a large number of unemployed people you have this demographic bulge that leads to...
 
Haseeb Drabu: I think that is a trivialisation and simplistic understanding of the whole issue. Kashmir has had the lowest unemployment rates in India. Every state that has an unemployed rate higher than 4% would probably see stone-pelters. This is an issue which needs to be resolved politically. It is what I call an ethno-national issue. How one wants to understand it depends on where one is coming from. It can be addressed in J&K by following the economic route, therein creating stakes in the system for the people. I am not talking about the government system but the economic system. Today a large number of people don't have those stakes, which is where the problem originates. So there is a need to create that stake in a genuine manner. Things will start changing once you give those stakes. What is the total population of J&K? 1.2 crore. Of this there are about 40 lakh people between the ages of 15 and 60. Employable 10 lakhs right. You can absorb them in two days. Put a mandate on every Indian company by a government issued diktat. It can be done overnight. That is not the issue.
 
Story First Published: September 18, 2011 14:50 IST

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