One question being discussed intensely since the Congress’ sweeping win in the Karnataka Assembly election is whether the State’s finances will be capable of shouldering the burden of welfare measures promised in the party manifesto. A careful perusal of the State’s economy and finances suggests that this is certainly not impossible, and if calibrated well, can contribute not only to strengthening the social security of the vulnerable but also give a push to the stagnant demand situation, especially for small manufacturing and decentralised farm and non-farm economic initiatives.
In this argument, it is important to understand that the State’s economy is not confined to the exchequer, and that fiscal balance is not the only sound economic measure to achieve the dual goal of economic growth and ensuring the basic rights and social security of the most vulnerable.
Cost of guarantees
Nevertheless, let us first examine the fiscal implications of the much talked about guarantees.
These guarantees include 200 units of free electricity to all households (Gruha Jyoti), monthly assistance of Rs.2,000 to the female head of every family (Gruha Lakshmi), 10 kilograms of rice free to every member of a below-poverty-line household (Anna Bhagya), free travel for women in public transport buses (Shakti), and the Yuvanidhi scheme which promises Rs.3,000 every month for graduate youth and Rs.1,500 for diploma holders in the 18-25 age group, for two years.
All kinds of cost estimates for these guarantees, including Chief Minister Siddaramaiah’s own, in the range of Rs.50,000-60,000 crore a year, have been doing the rounds ever since the Congress won the election.
These estimates could be on the higher side if the government decides to apply a few filters, but even then it is likely to be in the Rs.35,000-45,000 crore range, which is about 12-15 per cent of the next Budget, which may be Rs.3-3.5 lakh crore.
Three questions that emerge in this respect are whether the new government can garner the resources to fund these promises, whether these measures are actually needed, and whether they will affect the State’s economy adversely.
There are two major ways in which the government can get resources to fund these guarantees. One is by using resources from existing programmes, either by repackaging or simply diverting from other heads that are not a priority anymore.
This is not very difficult, as there are a number of small proposals in the last Budget that the new government may not feel compelled to fund. For instance, the 2023-24 Budget has a provision for Rs.1,000 crore for two years going towards mutts and Hindu charitable organisations—something that Siddaramaiah refrained from doing in his previous tenure. Several other such examples exist, which, when combined, can shoulder a significant part of the burden of the guarantees.
They include proposed schemes linked to youth policy that are yet to be formulated, and hence easy to shelve, especially if the new ones are also targeting youth.
Need to prioritise sectors
A shift in the government’s priority can also mean more resources for a particular sector. For instance, the social services expenditure on health, education, rural development, urban development, and water and sanitation—both revenue and capital together—as a proportion of the Gross State Domestic Product (GSDP or total State income), experienced a decline from an estimated 4.68 per cent in 2019-20 to 4.29 per cent in 2022-23.
The seemingly small decline in percentage terms translates into high amounts in monetary terms: 4.68 per cent of the GSDP in 2022-23 would have meant an additional amount of at least Rs.8,500 crore for social services in the previous financial year.
Another way of funding new initiatives is, of course, by either generating more resources or through borrowing. After recording a revenue surplus (0.07 per cent of GSDP) in 2019-20, the State moved to revenue deficit status in 2020-21 (1.07 per cent of GSDP) and 2022-23 (an estimated 0.27 per cent of GSDP).
The fiscal deficit increased from 2.25 per cent of the GSDP in 2019-20 to 2.8 per cent in 2022-23, after breaching the 3 per cent limit set by the FRBM Act in 2020-21 (3.72 per cent) and 2021-22 (3.84 per cent). The total liabilities as a proportion of GSDP breached the Act’s 25 per cent limit to reach 26.7 per cent in 2021-22.
All this happened during the pandemic, when the State had to bear the brunt of the lockdown, although it continued to perform well in the area of fiscal marksmanship, which examines the degree of correspondence between budgeted projections of revenue and expenditure, and actual receipts and spending. This can at least partly be attributed to the fact that the senior bureaucracy, which is primarily responsible for revenue estimates, has remained stable and undisturbed in the State’s finance department, irrespective of the change of government.
Nevertheless, the government of the day has to take the responsibility for the decline in the average annual growth rate of the revenue receipts, which cannot entirely be attributed to the pandemic.
The average annual growth of revenue receipts declined to 6 per cent in the period between 2018-19 and 2022-23 (revised estimates), compared with 13 per cent between 2013-14 and 2017-18. The tax-to-GSDP ratio also fell from 6.56 per cent in 2018-19 to 5.89 per cent in 2021-22, indicating a near-stagnation in the ratio.
The non-tax-to-GSDP ratio has been stagnant at 0.5 per cent of the GSDP, which is worrisome. The share of own source revenue in GSDP has also fallen in the State.
This implies that there is scope for boosting the revenue by adopting measures that could help raise both tax-to-GSDP and non-tax-to-GSDP ratios. However, one of the most important reasons for the slowing down of the growth rate of revenue receipts is the decline in the State’s share of taxes from the government of India. This is expected to continue; even the Centre’s Economic Survey had said that Karnataka could see a decline in Central tax transfers by about 24.5 per cent between 2021-22 and 2025-26.
This happened because of the change in the sharing formula, as recommended by the Finance Commission, and also because the Central government refused to accept the 15th Finance Commission’s recommendation that it pay Karnataka a special grant of more than Rs.5,400 crore to partly compensate for its losses. Siddaramaiah had bitterly critiqued this while in opposition and has already started talking about it now to make a case with the Central government for this grant.
Irrespective of that loss, the government could seek ways of improving resources both through improved tax collection and through innovative ways of financing, without resorting to additional borrowing.
One area where there is still a lot of potential to harness more resources, which the new regime can think of eventually, is at the third layer of the government—that is, panchayats, municipalities and corporations.
Bengaluru city, for example, can contribute much more to the Bruhat Bengaluru Mahanagara Palike’s (BBMP) own source revenue, which currently forms about 63 per cent of its total receipts of Rs.11,163.97 crore (2023-24 Budget estimates), with the rest coming from State and Central grants.
There is huge potential to improve collections through property taxes, which account for more than half of the BBMP’s own source revenue. Per capita income from property tax in Bangalore is about half of what Delhi collects, and less than a third of what Mumbai collects.
The State government’s expenditure on Bengaluru by way of both direct expenses and grants to BBMP can come down if BBMP improves its own revenue collection.
Other urban municipalities can also perform better in this regard, which can ease the State government’s burden while also improving local accountability and quality of services. Given that Bengaluru houses a large number of the country’s high net worth individuals, the government may also think of roping them in to share a part of the burden of progressive welfare measures.
While the Assembly election results are a result of a combination of factors, they are also reflective of an underlying distress, especially among women and youth, who seem to have responded well to the promises of the Congress guarantees. Cooking gas cylinders, whose price is in the Rs.1,100-1,200 range, were very much part of the election rhetoric during the campaign as they are real issue for low-income households.
Women have to bear the burnt of the price rise, as the unaffordability of cylinders has meant shifting to less convenient and unhealthy fuels. In fact, many of these are not local issues, as the mainstream media termed it.
The same is true for gender issues, which too are not local. Whether it is scenes of female wrestlers protesting against sexual abuse in Delhi or school-going girls seeking the right to wear the hijab in coastal Karnataka, they resonate with women and influence their vote.
- Some of the new government’s guarantees are 200 units of free electricity to all households, a monthly assistance of Rs.2,000 to the female head of every family, and 10 kg of free rice to every member of a below-poverty-line household.
- There is a lot of potential to generate more revenue at the level of panchayats, municipalities and corporations.
- Karnataka’s economy is inherently strong and sufficiently diverse.
- The State must maintain the balance between policies that promote sectors that are low-growth but stable and those that are high-growth but volatile.
Economy and youth unemployment
Youth unemployment is high in general but higher among women. Something like free bus travel would indeed be welcomed by women as it makes them more mobile and has the potential of increasing their participation in the labour market.
As per ILO estimates, the unemployment rates of youth (aged 15-24 years) in the country were as high as 25 per cent in 2021 and 28 per cent in 2022. What is worrying is that this rate seems to be increasing rather than decreasing: the CMIE estimated the national average unemployment rate for youth (aged 15-24 years) at 45.8 per cent in the September-December 2022 period, which was much higher than the estimate for Karnataka, 22.1 per cent, which by itself was not low.
The CMIE estimates suggest that the number of unemployed youths in the State rose from 2.2 lakh to 4.3 lakh between September-December of 2019 and 2022. Despite growing reasonably well in the face of crisis, the economic growth in the country as well as in Karnataka has largely been jobless growth.
Karnataka’s economy is inherently strong and, despite being driven by the services sector, especially information technology (IT), it is sufficiently diverse with a fair presence of manufacturing and agriculture sectors.
It has also been performing relatively better than some other States that recorded negative growth in 2020-21. Karnataka’s Net State Domestic Product (NSDP) actually grew from Rs.14,67,522 crore in 2019-20 to Rs.15,75,400 crore in 2020-21, according to the Ministry of Statistics and Programme Implementation, registering a positive growth of 7.35 per cent at current prices even during a pandemic year.
A historical analysis of Karnataka’s growth over three decades between 1990 and 2020 that we undertook showed that the contribution of the tertiary sector—services also, including IT but not limited to it—to the State’s GSDP grew from 44 per cent in 1993-94 to 64 per cent in 1919-20, while the primary sector’s contribution declined from 32 per cent to 11 per cent, and that of the secondary sector remained constant at 25 per cent during the same period.
Interestingly, the following year, after the pandemic, the share of the services sector declined to 52 per cent while that of the primary sector, which is largely agriculture and allied activities, and the secondary sector, which largely comprises manufacturing, increased to 15 per cent and 33 per cent respectively.
This long-term analysis seen in conjunction with global shocks also revealed a clear pattern: export-driven service sub-sectors such as IT boost the growth rates when the global economy is moving upwards, and drive them down when the global economy is experiencing a decline and uncertainties, making the State susceptible to volatilities. Sectors such as agriculture and public services, with lower but consistent growth rates, are less vulnerable to global cycles.
Manufacturing is somewhat in between, where industries such as textiles are vulnerable to global demand but less in comparison to IT and related services. This implies that the State needs to maintain this balance between policies that promote sectors that are low-growth but stable, and those that are high-growth but volatile. This balance is also important because of the higher burden of livelihood shared by agriculture and manufacturing, as compared to services, especially the IT sector.
IT and allied sectors
IT and allied sectors have played a major role in Karnataka’s economic growth in terms of income, but creation of new job opportunities in these sectors has not kept pace with their income contribution. It is also important to note that the contribution of these sectors to revenue is largely through corporate taxes and foreign exchange earnings, and both these sources are controlled by the central government.
A State like Karnataka bears the burden of providing incentives to such industries, but the nature of federal finance is such that the State does not fully benefit from it, making it pertinent for the State to raise these issues with the Finance Commission.
The services sector in Karnataka has also buoyed other sectors such as construction, which has also contributed to job opportunities. However, much of this remains in the informal sector.
The new government would do well to improve relevant comprehensive skills among youth for two reasons: the tertiary sector has a high skill bias, and better and relevant skills would develop a non-farm economy and enable value addition of farm produce locally.
Transfers of money into the hands of people, especially youth and women, if designed and implemented well, can boost demand locally. This can, in turn, address the demand deficit that has been a major cause of the relatively slow economic growth in recent years, especially after supply side measures, including substantial lowering of corporate tax and infrastructural investments by the Centre, failed to push private investment.
If it is combined with measures that also push decentralised development, and secure greater engagement from local governments, the State will be able to attain economic growth along with greater social and economic security for all.
We need to remember that Siddaramaiah has enormous experience in managing State finances and if he retains Finance for himself, he will be presenting his 14th Karnataka Budget. The people of Karnataka hope that he will neither compromise social justice nor economic growth, but succeed in initiating a deeper process of inclusive economic growth.
Jyotsna Jha heads Centre for Budget and Policy Studies, a think tank in Bengaluru. She acknowledges inputs received for the budget data from her colleague B.V. Madhusudhan.