Financial crisis in Karnataka

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Karnataka is staring at a financial crisis and may end the year with a bigger than anticipated fiscal and revenue deficit due to a shortfall in the devolution of funds from the Centre, in addition to a gap in the state’s own tax collection. While the overall Goods and Services Tax (GST) compensation projected for Karnataka for 2019-20 was Rs 17,219 crore, the Centre has released only Rs 8,815 crore as of December, with finance department officers estimating that there would be a shortfall of about Rs 5,600 crore at the end of the fiscal. Out of the Rs 5,335 crore allotted in the budget for centrally sponsored schemes, only Rs 911 crore has been released so far. Unskilled labourers hired under Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) have not been paid their wages for three months as the Centre has defaulted on the release of about Rs 2,700 crore. This has put rural people in peril in a distress year where huge losses were suffered due to drought and floods. With less than three months to go for the year to end, the state has been able to mop up only about 72% of revenue through local taxes. The transport department is the worst performer with a collection of only Rs 4,864 crore as against the target of Rs 7,100 crore.

In addition to the economic slowdown, the state finds itself in a mess due to two main reasons. One, the farm loan waiver of about Rs 12,000 crore announced by previous chief minister H D Kumaraswamy. Two, extensive damage due to floods. While the state projected a loss of Rs 35,000 crore and sought an interim relief of Rs 3,000, the Centre has released only Rs 1,870 crore, in two instalments. This has forced the state to divert funds from other planned budgetary expenses to undertake relief works, increasing the financial strain.

Over the years, Karnataka has managed to maintain a revenue surplus and curtail the fiscal deficit to less than three per cent of the State Gross Domestic Product (SGDP) as mandated by the Karnataka Fiscal Responsibility Act. However, financial stress may force the government to increase borrowings, thereby upsetting this balance. Though 25 out of the 28 MPs from the state belong to BJP, they have done pretty little to pressurise the Centre to release the required funds. Karnataka is staring at an unenviable situation. Chief Minister B S Yediyurappa should immediately release a white paper on the state of finances and also a road map on how the state proposes to tackle the crisis.

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