Promises and sops: Political parties woo economically sound Karnataka

State does well in many economic parameters, but freebies promised by parties may spoil its finances

Karnataka did well economically under two parties, Janata Dal (Secular) and Bharatiya Janata Party, in the last five years. The state has had four chief ministers, three of the BJP and one of the JD (S), after elections in May 2018. BJP’s B S Yediyurappa ruled for only six days and he was reinstated again after his successor, JD (S) leader H D Kumaraswamy, lasted for over 14 months in power. Yediyurappa resigned on July 28, 2021 and since then Basavaraj Bommai of the BJP has been CM.

Karnataka's economy, in the recent past, has grown a bit higher than the national average and when gross domestic product (GDP) fell due to the first wave of Covid-19 in 2020-21, the rate of contraction in the state was much smaller than the all-India figures. Even when national economic growth slowed down prior to 2020-21, the state held on to its growth rate of the previous year. While the GDP growth at the national level fell from 6.5 per cent in 2018-19 to 3.9 per cent in 2019-20, the state's economy expanded by 6.2 per cent in both years.

Karnataka's per capita income has been far behind Delhi and Sikkim, but it was among the four top ranking states in terms of per capita income in five years. In 2021-22, its per capita income at Rs 278,786 was the third highest in the country. It was 87 per cent higher than the national average of 148,424. However, it was way down (41 per cent) than Sikkim's Rs 472,543 and (31 per cent) than Delhi's Rs 401,982.

Karnataka topped Maharashtra in terms of drawing the highest foreign direct investment (FDI) in 2021-22. It drew $22.07 billion of FDI that year, accounting for 37.5 per cent of total FDI that India got ($58.77 billion). Maharashtra was behind at $15.4 billion. However, Karnataka could not sustain the pace in the first nine months of 2022-23. Maharashtra again emerged as the top ranking state in terms of FDI, attracting $10.8 billion, followed by Karnataka at $8.8 billion.

Karnataka’s unemployment rate has been lower than the national average. The rate stood at 3.2 per cent in 2021-22 against 4.1 at the national level in 2021-22. The trend has been the same since 2018-19. However, the periodic labour force survey (PLFS), from which data is compiled, did not bring out disguised unemployment.

The state’s retail price inflation rate also closely matches with the national average, but the former was a bit lower than the latter in recent months. While at 6.7 per cent, the national inflation rate stood above the Reserve Bank of India's (RBI’s) upper tolerance level of 6 per cent in 2022-23, it was a bit lower at 5.5 per cent in the state.

Political promises

Given this backdrop, the various sops promised by political parties during their campaign for the Karnataka assembly elections on May 10 are affordable to some extent. The state is financially sound to implement these schemes, but its committed expenditures are rising and limit the scope to dole out freebies.

Among various promises by political parties, the ruling BJP has promised half a litre milk every day, five kg of millets every month, and three cooking gas cylinders every year to every household below poverty line. The Congress, on the other hand, has announced giving 200 units of free electricity, 10 kg of rice to low-income families, Rs 3,000 monthly allowance for unemployed graduates and Rs 1,500 for (jobless) diploma-holders for a period of two years. 

JD (S) has announced an assistance of Rs 10,000 per acre for up to 10 acres for farmers to procure seeds and fertilisers under the Raitha Bandhu programme. And the Aam Aadmi Party (AAP), a new entrant, has promised 300 units of free power for domestic users, free city bus transport for students, mohalla clinics and Rs 3,000 unemployment allowance till a candidate gets a job.

Karnataka's own tax revenue (OTR) constituted over 70 per cent of its revenue receipts in recent years and is projected to stand at almost 73 per cent in the current financial year. The state does not have much revenue deficit. In fact, it is projected to have a small revenue surplus of 0.02 per cent for the current financial year.

However, its committed liabilities—salaries, pension, interest payments and administrative expenses—are projected to gallop to 60 per cent for FY24 from 55 per cent in the previous year and 45 per cent in 2021-22.

The state will implement the 7th pay scale from the next 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, it 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.  

As such, the state's revenue receipts might not afford various freebies announced by the parties, unless revenue deficit and hence fiscal deficit is widened. At present, the fiscal deficit is well under three per cent of the gross state domestic product (GSDP). Else, it will have to shrink its capital expenditure, which is projected to stand at Rs 58,328 crore in 2023-24, constituting a bit more than one-fourth of the total expenditure at Rs 2.25 trillion.

The state has sent a team of government officials to Rajasthan to study the northern state’s old pension scheme (OPS). If political parties also compete with one another to bring the OPS back, the space for freebies will shrink further, though not immediately.