JOIN USKarnataka Budget could have done more to spur growth
Analysis of a Budget cannot be divorced from the prevailing economic situation. Even more so when the Indian economy is in the midst of a severe crisis. Even though private corporate investment is the source of most jobs and GDP growth, governments haven’t been able to inspire investment confidence for a decade now. As per RBI, capital expenditure plans of the private sector have shrunk in absolute terms to less than one-third of their size in 2010-11.
Karnataka’s own story is no different. The growth rates of industrial and services sectors have dropped by 0.8 per cent and 1.9 per cent in the past one year alone. So the question we must ask is: What has the Karnataka government planned in this year’s Budget to revive the confidence of the private sector urgently?
Also read: Karnataka Budget key takeaways
This question becomes all the more important because this year’s Union Budget failed to provide a coherent strategy to revive private sector investment. Hence the passing on of the buck to states such as Karnataka, which are robust engines of growth for the Indian economy. It was up to the Yediyurappa government to utilise the revenue and expenditure handles at its disposal to spur economic growth. So this article looks at four drivers of growth in Karnataka and what the Budget has done with respect to them.
Four drivers of growth
Bengaluru: Karnataka’s foremost engine of growth is Bengaluru itself. In these times of economic crisis, the focus of the Budget should have been on increasing the productivity of Bengaluru. In a tough economic situation, it is important that governments do not push away high-tech firms away from Bengaluru in the hope that they will set up shop in tier-2 cities. Most likely they won’t invest at all. So it was good to see that the CM acknowledged the contribution of Bengaluru when he said that it is imperative to give special attention to Bengaluru for the sake of economic development of the state and the country.
The CM’s announcement to formulate a new Municipal Corporation Act specific to Bengaluru is also a step in the right direction. It is important to understand that Bengaluru’s fundamental problem is under-governance, and not over-population. It needs a new, empowered municipal body to plug its many governance deficiencies. It remains to be seen whether this key governance reform will be implemented soon.
There were also allocations towards a comprehensive mobility plan with an aim to increase the utilisation of public transport from 48 per cent to 73 per cent. Given that fast and cheap travel within a city is a key factor for increasing productivity of residents, the prioritisation of suburban rail, metro, and road networks will go a long way in boosting long-term growth.
That said, a missed opportunity with regards to Bengaluru was the chance to increase floor space index (FSI) in the city in order to increase the supply of real estate and make it affordable for individuals and small firms.
Industry and services sector: On this count, the budget failed to make a radical departure from past approaches. There were several initiatives to encourage specific industries but there was no commitment made towards labour reform — a key enabler for rapid industrial growth. Notably, Rajasthan made labour laws more flexible in 2014 while the Union government has failed to take up an India-wide reform since then. Karnataka is also in need of such a reform but the Budget made no commitments on that front.
The CM did announce that ‘rules will be framed to enable investors to purchase land directly from the land owners at the place identified for the establishment of industry’. If implemented, this partial land reform can decrease capital costs for new industries.
Recently, there were also reports that the government plans to introduce reservation for locals in private industries following Andhra Pradesh’s lead. Not only are such reservation requirements against the free movement of labour, they place an additional burden on industries leading them to relocate to neighbouring states with more relaxed policies. Fortunately, no mention of this move was made in the budget speech and hopefully, such a counterproductive policy will not be taken up in the near future.
Taxes: A third engine of growth is to put more money in the hands of individuals and firms by decreasing taxes. However, faced with a reduction in central transfers combined with its own inability to explore additional revenue options, the government has increased taxes on petrol and diesel and excise duties on Indian Made Liquor.
There were two missed opportunities here. One, the Karnataka government owns 102 public sector units, 12 of which have been in ‘non-working’ condition for more than five years. This opportunity to mobilise additional revenues by divesting from these PSUs found no mention in the Budget. Two, decreasing subsidies on consumption of private goods such as power supply, piped water etc. is another way to mobilise additional resources. Again, there seems to be no urgency in this regard in the Budget.
Agriculture sector: In the last financial year, this sector saw a growth of 3.9 per cent in the state. To increase this further, land reforms and market reforms are necessary. The state was a pioneer in giving freedom to farmers to sell their produce to markets of their choice. However, last year, a CAG report remarked that the gains from these moves have been extremely limited because of inadequate planning and improper implementation. Nothing in this Budget suggests that the government is serious in completing this market reform in letter and spirit.
Finally, we need to remember that economic policy is a year-long process and not an exercise that gets over on the budget day alone. Hopefully, the state government will realise the urgency of the economic situation and use this crisis to take up reforms to bring prosperity to all its residents.
(Pranay Kotasthane is a Fellow at the Takshashila Institution)
Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.