Earlier this week, the Cabinet decided to amend the Fiscal Responsibility Act (FRA) for the third year in a row to help Karnataka tide over a financial crisis where the state’s debts have risen.
The amendment seeks to increase the cap on the state’s debts and fiscal deficit, in addition to permitting revenue deficit.
Accordingly, the government has now fixed the fiscal deficit cap to 3.5% of the GSDP, while allowing debts to exceed 25% of the GSDP. According to the FRA, debts should remain within 25% and the state must always have a revenue surplus.
Revenue deficit is estimated to be Rs 14,699 crore for the year 2022-23. Fiscal deficit is expected to be Rs 61,564 crore, which is 3.26% of GSDP, while the total liabilities at the end of 2022-23 is estimated to be Rs 5.18 lakh crore, which is 27.49% of the GSDP.
In the 2022-23 Budget, Chief Minister Basavaraj Bommai expressed optimism about the state’s economic growth and development. He announced several welfare and infrastructure schemes.
However, Karnataka needs much time and effort before it can achieve revenue surplus again and bring down its debts below 25% of the GSDP.
“I would peg that the state will require 8-10 years of fiscal discipline before getting back on track. This means that successive governments will have to bear the brunt of this crisis,” a senior minister in Bommai’s Cabinet told DH.
In such a scenario and with one year to go for the Assembly elections, how much of the promised projects will the government be able to deliver?
The Medium Term Fiscal Plan (MTFP) 2022-26 flags that in the given financial situation, Karnataka has little scope for new projects. As the growth in revenue receipts in the immediate future may not deviate much from the existing trend, it is important that timely measures are taken by the state to contain the revenue expenditure, it cautions.
Unless there are large-scale measures led by the Centre, Karnataka’s growth story will remain slow, points out B V Madhusudhan Rao, Senior Research Advisor, Centre for Budget and Policy Studies.
“All state governments are making efforts. But, with taxing power being taken away from states and given to GST Council, there is little that states can do. The Centre will have to take some large measures. Otherwise, the state government will have to keep borrowing money, of which 50% will go towards meeting revenue deficit,” he says.
If this vicious cycle of borrowing and revenue deficit continues, big-ticket infrastructure projects such as the Mekedatu or the Upper Krishna projects may remain only as token announcements, he observes.
The state government has, over the years, made a habit of announcing projects without factoring in the budget.
“A token amount is allocated in the budget and the project will keep dragging on for years. They will even encourage calling for tenders, but it will go nowhere,” a former bureaucrat laments.
A legislation must be brought in prohibiting announcement of new schemes unless at least 1/3 of the budget is available for new projects, he urges.
Increasing capital receipts in the near future by monetization of selective government assets, generating revenue from disinvestment in certain government initiatives, apart from identifying unused funds in various boards/corporations are among the several recommendations made by the MTFP.
With a long road ahead for the government, it’s immediate focus should be on backward taluks.
It should prioritise the 93 aspirational taluks that lack in basic infrastructure and are falling behind in sustainable development goals, says Karnataka State Policy & Planning Commission deputy chairperson B J Puttaswamy.
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