'Expenditure subsidy control crucial for K'taka'

India Ratings & Research (Ind-Ra) expects Karnataka’s real economic growth in FY15 to be around 6 per cent, based on the expectation of the state’s nominal growth of 13.89 per cent year-on-year (YoY) and an inflation rate of 8 per cent in FY15.

The government of Karnataka (GoK) estimates the economic growth to be 5 per cent YoY for FY14 according to the advanced estimates. The agriculture sector rebound in FY14 has failed to inspire the state’s economic growth due to a slump in the industrial and services sectors. Industry growth slowed down to 1.2 percent YoY in FY14 as against 4.4 per cent YoY in FY13 and the services sector decelerated to 7.2 per cent from 8.4 per cent.

GoK expects revenue receipts to grow 17.79 per cent yoy in FY15 budget estimates (BE) from 20.59 per cent yoy in FY14 revenue estimates (RE). The state’s own tax revenue buoyancy of 0.98x in FY15BE is based on the expected recovery in industrial performance. Non-tax revenue declined 2.7 per cent YoY in FY14RE after contracting 2.96 per cent yoy in FY13. However, the state expects the non-tax revenues to grow 15.91 per cent yoy in FY15. In FY14, grants soared 90.87 per cent yoy and the state expects grants to buttress the FY15BE (35.08 per cent yoy) revenue estimates.

In Ind-Ra’s view, grant-led fiscal consolidation could rescue the state’s finances for a short term. However, any long-term reliance will create volatility and is untenable.
The state projects its expenditure to increase by 17.57 per cent yoy in FY15BE as against 23.48 per cent in FY14RE. Select committed expenditure (salary, pension and interest)/revenue expenditure is likely to harden to 38.25 per cent in FY15 from 34.67 per cent FY14RE. Salaries, pension and interest will grow 39.14, 15.43 and 24.36 per cent YoY, respectively in FY15.

State predicts subsidies to shrink 20% yoy in FY15 as against a 26.46 per cent yoy increase in FY14RE. Ind-Ra views a decline in the proportion of selected committed expenditure in the current expenditure and a contraction of subsidies as major factors to achieve FY15 budget targets. Importantly, any slippage in subsidy will alter FY15 fiscal arithmetic.

Major operation and expenditure (O&M) contracted by 14.68 per cent in FY14RE and other O&M growth was limited to 46.94 per cent as against the projected 80.02 per cent. Nevertheless, unlike many states, GoK did not scale down its capital expenditure to achieve fiscal targets. Revenue balance/GSDP accentuated to 0.01 per cent in FY14RE (FY13: 0.36 per cent) and will marginally increase to 0.04 per cent in FY15BE. Fiscal balance/GSDP is likely to be 2.92 per cent in FY15.

Although the state has remained within the 13th finance commission (13FC) targets, the recent episode of increasing dependence on the Centre for meeting fiscal targets weakens the state’s fiscal regime. Ind-Ra believes the state would continue to adhere to 13FC fiscal goals, nevertheless few revenue and expenditure assumptions appear optimistic.