State budget needs realistic projections

For the second successive year, Chief Minister B S Yeddyurappa who is also the finance minister is grappling with a revenue shortfall of more than Rs 5,000 crore that has left a gaping hole in the state’s finances.

Nor did the chief minister cover himself with glory during his fund raising efforts for flood relief. Initial estimates to the chief minister's flood relief fund were projected at Rs 1,000 crore while the final figures turned out to be under Rs 100 crore.

With his credibility and survival at stake, Yeddyurappa needs to project realistic numbers and introduce innovative programmes in the upcoming 2010-11 fiscal year budget to regain the trust and confidence of people of Karnataka.

Three key sectors for job growth in Karnataka - technology, textiles and construction are all likely to show tepid growth and employees in these sectors are expected to withhold spending until incomes start to rise and fear of losing jobs recedes. With credit flow to medium and small scale industries yet to take off, Yeddyurappa should be cautious in assuming growth figures and will be wise to rein in revenue and expenditure projections below last year’s budgeted levels.

Political base
In the last two budgets presented by Yeddyurappa, development took a backseat to populism. Allocations were made to religious institutions and programmes with the sole aim of appeasing party’s political base. A slew of infrastructure projects were announced with inadequate funding to sway voters just before Lok Sabha elections.
While JNNURM funding has been used this year to complete some of the on-going projects, the ones dependent on state’s own revenues have come to a grinding halt. Also in the last two years, state’s own revenues and share of central taxes have fallen while borrowing has seen a substantial increase.

Capital expenditure has not increased proportionate to the debt increase suggesting a failure to invest borrowed funds for long term benefits. Power subsidy in the current fiscal year stands at Rs 2,400 crore and is rising at an untenable pace. Adverse fiscal trends are ominous and Yeddyurappa needs to reverse many of these in the upcoming budget.
The finance minister could hurt his cause if he resorts to revenue generation by increasing tax rates or by introducing new taxes. According to the RBI study on state finances, Karnataka is one of the highest taxed states in the country and with high inflation already putting a dent on incomes, any increase in tax rates will be met with derision by both businesses and general populace.

Plug loopholes
Rather than increase tax rates, the chief minister should plug loopholes in excise taxes, stamp duty collections and eliminate leakages. He should take a leaf out of centre’s booklet and privatise some of the state public sector companies (KSDL, KSFC, KEONICS, MSIL etc.) to fill up the state coffers with much needed resources.
Among the infrastructure needs of the state, power situation is grim with very limited short term options. The chief minister needs to show urgency in choosing a new site for the Ultra Mega Power Project (UMPP) and should seek immediate approval and funding from Central government.

Bangalore is a construction zone and Yeddyurappa will be well advised to ensure completion of existing projects in the state capital before announcing new ones. The 2008-09 budget proposal of Suvarna Karnataka industrial corridors with 8 lane road connectivity is yet to reach even the planning stages. Along with the information highway project, it should be given priority to spur development and growth in interior Karnataka.
Pursuing a populist agenda in the upcoming budget that is full of empty promises is likely to further alienate the voters. Instead  Yeddyurappa should focus on presenting a budget that allocates funds for the completion of infrastructure projects, improving agricultural productivity, enhance investment climate and advance the socially backward in the state. Only through an inclusive development agenda and a budget that captures the imagination of people, can the chief minister reinvigorate the people of Karnataka, regain his credibility and ensure his survival.

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