Karnataka is a fiscally progressive state with all indicators falling in line with the rules prescribed in the Fiscal Responsibility Act, 2002. Fiscal and revenue deficit targets have been achieved as per timelines and continue to be within stipulated levels, albeit with a reduced level of revenue surplus.
Debt-to-GSDP (gross state domestic product) ratio is also within the limit of 25 per cent of GSDP. The state’s tax-to-GSDP ratio is one of the highest in the country. On public expenditure front, the state compares very well with the other Indian states in terms of per capita development expenditure and plan expenditure.
Can the state remain complacent with these achievements?
What challenges are involved in sustaining its sound fiscal health and translating its fiscal efforts to improve the human and economic development of the state are key questions to be addressed in framing future policies. Karnataka’s tax performance has been good over time, and the state compares well with other Indian states. A major challenge is to sustain the high tax effort, which is largely linked to the state’s overall economic growth.
However, the state’s non-tax performance is very poor and needs to be strengthened substantially. The Expenditure Reforms Commission (ERC) has recommended a ‘user charge policy’ for each department. Studies have revealed that users are willing to pay if the quality and assured supply of services are good.
There is substantial scope to enhance ‘fiscal space’ on the expenditure front. Sustaining the sound fiscal health of the state in the long run and improving it further are possible mainly through public expenditure reforms. There is an urgent need to reprioritise expenditure to more productive sectors and weed out those that have outlived their utility.
There are many schemes with small allocations, and the ERC has made a number of recommendations regarding the merger of schemes wherever possible. Emphasis should be on strengthening existing schemes by allotting adequate funds for maintenance rather than announcing new schemes.
The social and economic infrastructure needs to be periodically ascertained, and appropriate strategies such as partnering with the private sector or direct provisioning should be adopted to address the inadequacies. The current importance attached to enhancement of ‘outlays’ has to be shifted to ‘outcomes’.
The economic infrastructure inadequacies, slow progress in human development index (HDI) (compared to even states that have lower per capita expenditure than Karnataka) and the glaring regional inequalities are worrisome. The state needs to address these issues on a priority basis by toning up public expenditure planning and management.
The fiscal reform process has still not focused on redefining the ‘role of state’ in changing times. This is an opportune time to make a systematic delineation of the responsibility of the state in terms of direct provision, facilitation, regulation etc. Expenditure reprioritised on these lines would not only right-size the government but also help improve the allocative efficiency of public spending.
The state’s development policies should not be subjected to political economy gains in the long term interest of the state.