BENGALURU: Karnataka’s budget this year is under strong financial stress, and managing the books must have been a challenging exercise for the finance department and veteran budget manager Shri Siddaramaiah. He has long experience in presenting and defending 14 State budgets.
Devolution from the Finance Commission is one of the main issues. The State economy is poised to grow at a nominal rate of 10.2% (6.6% in real terms) in 2024-25. The reduction in share of devolution, from 4.713% from the 14th Finance Commission (FC) to 3.64% from the 15th FC, posed a new challenge to the State to meet its revenue requirement and match its expenditure ends. The devolution to Karnataka, which witnessed significant growth from Rs 14,809 crore in 2014-15 to Rs 35,895 crore in 2018-19, has remained around Rs 32,155 core in the last five financial years.
The change in methodology for horizontal allocation of the pool of all taxes; adoption of GST with limited tax autonomy and fiscal space to States; depriving States of their legitimate share of revenue from cess and duties, were partially responsible for the reduction in share, resulting in an estimated loss of Rs 1.87 lakh crore in the process. Similarly, grant-in-aid to the State has been hovering around Rs 16,583 crore since 2016-17, and is expected to be lower in 2024-25 at Rs 15,299 crore. Therefore, management of the fiscal house was truly a challenge.
In this background, the budget created some interesting expectations amid opposition to the five guarantees provided by the government. It was managed prudently in the last budget. Along with the five guarantee schemes, works worth Rs 21,168 crore and Rs 2,230 crore were approved for inclusive and accelerated development.
In the growth decomposition of the state economy, the services sector registered a growth of 8.7 per cent. However, the industrial sector grew at a slightly lower rate of 7.5 per cent, but performance of the agriculture sector registered a decline to 1.8 per cent due to bad weather. Even with this, the FDI recorded an impressive addition of $2.8 billion. This year, the State tax revenue has shown a substantial gain and reached Rs 1,89,893 crore, that is 17.58 per cent higher than the revised estimate.
The most important aspect of this budget was focused on revenue, with total revenue receipts pegged at Rs 2,63,177 crore, which is over 16 per cent higher than the revised estimate of 2023-24. Of the total revenue, Central government grants are expected to be Rs 15,299 crore. This indicates an intelligent manoeuvring in maintaining revenue and fiscal deficits within the FRBM limit. Since he did not increase taxes, the revenue account deficit stands at Rs 27,353 crore on higher provision for salaries and pensions, to the tune of Rs 80,434 crore and Rs 32,355 crore, due for the Seventh Pay Commission.
A quick analysis of emerging deficits is more due to shortage of revenue sources and difficulties in garnering revenue in the face of Central grants. Even under this stressful revenue situation, the finance minister has managed to keep fiscal deficit well within the FRBM requirement of below 3% of the GSDP. Given the slender spaces under the stress of revenue generation and promises to keep the budget is cautiously managed without any significant step-up in taxes, and putting the people of Karnataka in economic difficulty.
The revenue deficit is about Rs 27,354 crore, and is higher than the revised estimate of last year. Fiscal deficit is pegged at Rs 82,981 crore, which is 2.95 per cent of the GSDP. The CM stated that liabilities at the end of 2024-25 would be to the tune of Rs 6,65,095 crore, which is 23.68% of GSDP. In totality, the finance minister has very effectively managed the budget to meet the norms of fiscal discipline, by confining fiscal deficit and total outstanding liabilities within the FRBM limits.
An overall analysis of presentation of this budget involved major challenges. This budget shows that 52 per cent of the total revenue comes from its own tax efforts but also shows 28 per cent borrowings to manage the books. The share of Central taxes and grants are estimated at about 16 per cent of the revenue. This can be called a growth-inducing budget with $2.8 billion Foreign Direct Investment flowing in, and good encouragement to industries and services. It has a strong welfare angle with allocations to minorities, Scheduled Castes and Scheduled Tribes.
The Chief Minister looks forward to a prosperous Karnataka, and with a smart move for the forthcoming election, has provided support to farmers, women, youth and marginalized sections. This will be seen as growth orientation with inherent political gains.
RS Deshpande
Visiting Professor at the Institute for Social and Economic Change, Bengaluru
Khalil Shaha
Researcher, Institute for Social and Economic Change
Email: khalil@isec.ac.in