Subsidy swell could hurt state’s revenue space

Bulging expenditure on subsidies is making it hard for the government to make spending manoeuvres, with the Finance department pushing Chief Minister B S Yediyurappa to contain this burden while he prepares for the 2020-21 budget.

Karnataka spends Rs 22,900 crore on various subsidies, a 53% increase from six years ago. Rising subsidies and the push for direct benefit transfer (DBT) schemes are among key fiscal challenges the government has identified.

The administration is already facing a tough time on the fiscal front, what with funds earmarked for development being diverted towards flood relief works.

The Comptroller and Auditor General (CAG) has also flagged the swelling expenditure on subsidies. "Since the costs of salary, pension and interest are inflexible, the expenditure on subsidies, grants-in-aid other than to local bodies, which are increasing steadily, requires utmost attention from the state government," the CAG said in its state finance audit report tabled in the legislature last week. Containing subsidies will enable the government to attain revenue surplus to a considerable extent, the auditor added.

Major subsidy outgo is on free electricity to farmers to use agricultural pump sets, food subsidy, interest subsidy for crop loans and transport.

"The Fiscal Management Review Committee has been flagging this for a long time," a senior Finance department official said. "But it's for the government to take a stand. For instance, will they cut the supply of free rice under Anna Bhagya from 7 kg to 5 kg? Or, will they discontinue some existing schemes?"

This could be reason behind Yediyurappa asking officials to prune costs wherever possible, including reviewing Anna Bhagya beneficiaries.

According to the Medium Term Fiscal Plan (MTFP), the expenditure on subsidies will touch Rs 27,702 crore by 2022. This is excluding indirect subsidies given in the form of financial assistance and incentives such as supply of seeds to farmers.

The fiscal stress was evident in the previous 2018-19 financial year when the government achieved a revenue surplus of Rs 194 crore. This fiscal, it is estimated to be Rs 258 crore. Last fiscal, the state’s fiscal deficit was 2.85% of the GDP, just below the 3% limit.

"Though the size of budget has gone up over the years, it is characterised by a
substantial portion being in the nature of committed expenditure (salaries, interest, pension, subsidy etc). This reduces manoeuvrability around expenditure decisions," the MTFP has said.

"This (rising subsidy expenditure) will be examined during the preparation for the next budget," M Lakshminarayana, advisor to the chief minister, said.