Whipping the tired horse
The budget punishes lawful taxpayers; Expenditure on agriculture has remained static
Karnataka's economic performance over the last five years has been phenomenal. Except for a little slowdown as a fallout of global recession, the State has witnessed fiscal stability and embarked on a path of " Revenue-led development". The Budget 2011-12 appears to be a deviation from the path pursued over the last eight years.
Taming the prices through proper containment of inflation should have been the dominant policy objective in the current scenario. There are almost no measures in place to contain inflation. Instead, the citizens have been burdened with increased tax load. The keenness on the part of the Government to make available more resources for the development of the State is understandable. But, the question is “should additional resources be generated from increased tax rates?”
Nullified
“Tax effort” is the ratio of tax to GSDP as a percentage. This represents the efficiency of the tax administration system.
In 2004-05, efforts were made to increase the efficiency of tax collection and as the result “Tax Effort’ began improving, reaching 11.3% in 2006-07. This upward trend was short-lived and from 2007-08 onwards, the tax effort has shown decreasing trend. Tax effort came down to 10.8% in 2007-08, 10.2% in 2008-09 and 8.9% in 2009-10. VAT rate was increased by 1 % in 2010-11 and this should have led to 9% increase in consumption tax inflows. On account of increase in VAT rate the tax effort should have been 12.3% but it is at 9.6 % only. It also means that the efficiency of the tax administration and tax enforcement activities have come down. About Rs 8000 crore is perhaps the annual loss of taxes on account of poor tax enforcement efforts. Instead of correcting the declining trend of tax effort, the State has decided to punish the “lawful tax payers” by increasing the VAT rate by another 0.5%. This is like whipping the tired horse.
Increase of VAT on gold may appear as a step in the right direction, but it may not benefit the state as gold trading may get diverted to other states.
Karnataka has one of the lowest non-tax revenues to the GSDP ratios in the country. As per the RBI report, the national average of own non-tax revenues to the GSDP was 1.3 pc during the year 2007-08 (RE), against Karnataka's ratio of 0.8%. Budget 2011-12 has made no effort to improve the resources from “Non-Tax Sources”, which is disappointing. The rising debt stock is another matter of concern. Debt stock for 2011-12 should have been within Rs 1,01,953 crore as per the Medium Term Fiscal Plan (MTFP) 2010-14.
Including the burden of “off-budget borrowings” this limit has been exceeded in 2010-11 itself.
Even from the criteria of limiting debt stock in terms of "Total Revenue Receipts", the limit has been crossed. Thirdly, even as a share of GSDP, the volume of debt stock has crossed the limit of 25.2%. It is therefore better for the State to exercise some restraint in borrowing.
Marginal allocation
Agriculture growth in Karnataka has remained at a dismal 0.5 per cent in the past decade, thanks to the abysmally low expenditure.
Further, by separating the “Agriculture” section from general budget speech, a message has been conveyed to people that this Government is committed to development of agriculture. The same concern, however, is not reflected in sectoral allocations.
The first ever “Agriculture Budget” appears more as an “Agriculture and allied sector - Expenditure plan”. About 18 per cent of resources were allocated in 2009-10 and 2010-11 to “Agriculture, irrigation and Rural Development”.
The allocation to this sector remains the same even in 2011-12 budget! While it appears that a special emphasis has been given to “Agriculture”, the increase in allocation to this sector is very marginal. Considering the fact that debt servicing burden of Irrigation corporations is more by Rs 1,652 crores in 2011-12 than the previous year the allocation to programmes may not be very high.
Programmes like NREGA or subsidised food distribution programmes can at best mitigate the poverty. But, the Economic Survey 2011 has brought out the fact that multidimensional poverty in the State is as high as 52 per cent. This means more than 50 per cent of citizens of Karnataka, most of them living in rural Karnataka, have not benefited from the growth that the State has achieved over the last seven years.
(The writer, a retired IAS officer, was the secretary, Finance, Government of Karnataka)
