Karnataka may keep additional expenditure on 5 poll promises fiscal neutral

As the debate on freebies continued, with Prime Minister Narendra Modi urging the states to be fiscally prudent, the new Karnataka cabinet approved five promises announced by the Congress in its manifesto for the state assembly elections.

At the outset, it seems that the promises -- Rs 200 units of free power to below poverty line (BPL) families, Rs 2,000 allowance to women head of families, Rs 3,000 for graduates unemployed for up to two years after graduation and Rs 1,500 for unemployed diploma holders, Rs 10 kg of free rice for all members of BPL homes, and free bus travel for women -- would turn the revenue surplus position of the state, as projected by the Budget presented by the previous Bharatiya Janata Party (BJP) government, into revenue deficit, as well as widen the fiscal deficit to over four per cent from over two per cent of the gross state domestic product (GSDP) for 2023-24.

However, announcements made by the new state government indicated that the Siddaramaiah government may absorb the additional expenditure on introducing five poll promises within the fiscal and revenue balances as projected by the BJP government for the current financial year.

The implementation of these promises may cost the exchequer an additional sum in the range of Rs 45,000-50,000 crore.

While the chief minister has put the cost at Rs 50,000 crore a year, some Congress leaders pegged it at Rs 45,000 crore. Assuming that the cost would be in the upper range -- Rs 50,000 crore a year-- it would mean roughly Rs 42,000 crore hit on the exchequer for the remaining ten months.

Assuming ceteris paribus (other things remaining the same), this may turn the revenue surplus of Rs 402 crore for 2023-24, as projected by the Budget presented by the previous BJP government, into a revenue deficit of about Rs 42,000 crore. In other words, a revenue surplus of 0.02 per cent of GSDP would become a revenue deficit of 1.8 per cent. This would be so given the fact that all promises are revenue expenditure in nature.

This would also mean over Rs one trillion fiscal deficit for FY24 against Budget Estimates (BE) of Rs 60,681.4 crore. In other words, this would be an expansion of the fiscal deficit from 2.6 per cent of GSDP as given in the previous Budget for 2023-24 to 4.3 per cent of GSDP.

However, Siddaramaiah said his government would curtail wasteful expenditures and augment tax revenues. He also said the budget size would be raised from Rs 3.10 trillion, as given in the BJP budget for 2023-24, to Rs 3.25 trillion in the Budget to be presented in July. This meant only Rs 15,000 crore of additional expenditure.

He also said the state government will try to collect Rs 15,000 crore of revenues through a strict collection of taxes.

If that happens, there would be no additional burden on the government in terms of fiscal consolidation.

However, these would be projections in the new Budget for 2023-24 and the reality would be known by the year-end.

The state's committed liabilities — salaries, pension, interest payments and administrative expenses — are projected to gallop to 60 per cent for FY24 (by the BJP government's Budget) from 55 per cent in the previous year and 45 per cent in 2021-22.

The state is also implementing the 7th pay scale from the current financial year. A fiscal consolidation paper presented along with the Budget for 2023-24 says the implementation of the 7th pay scale for the state government employees would lead to a steep increase in salaries and pension liabilities of the Karnataka government in the coming years.

Depending on the fitment factor, the additional financial implication of implementing the 7th pay scale would range between Rs 12,000 crore and Rs 18,000 crore for the first year of implementation, the fiscal consolidation paper said.

If one adds other committed expenditures — such as subsidies, financial assistance and devolution to local bodies — the total spend under this head is projected to constitute 92 per cent of revenue receipts in 2023-24, according to the Budget papers.  

The state has also sent a team of government officials to Rajasthan to study the northern state’s old pension scheme (OPS). If the new government also competes with other states to bring the OPS back, it would hit the exchequer further, though not immediately.