Karnataka does not survive on the Centre's largesse: MV Rajeev Gowda

Former Member of Parliament and Congress Research Department Chairman M V RAJEEV GOWDA tells Archis Mohan that the Congress party’s ‘five guarantees’ in Karnataka will help families offset the effects of inflation and income stagnation, especially those outside Bengaluru. He says the money transferred to families will re-circulate in the economy, increasing consumption-driven growth due to multiplier effects. Edited excerpts:

Why the five guarantees?
 

The five guarantees address widespread distress due to inflation, unemployment, and stagnant incomes. The price of every basic necessity has increased manifold under the Narendra Modi government. Households are unable to afford basic necessities. Women are significantly affected since they often manage household finances.

Under the Bharatiya Janata Party’s (BJP’s) double-engine sarkaar, Karnataka’s labour force participation rate fell from 50 per cent in December 2016 to 38 per cent in December 2022, meaning 12 per cent stopped looking for work.

The impact is highest among youth. The proportion of youth in the labour force has fallen by more than two-thirds, from 34 per cent in 2016 to only 13 per cent now. Youth unemployment is sky-high at 22 per cent. Also, real wages across the country have stagnated under Modi’s leadership.

There are concerns that Karnataka’s finances would struggle to sustain such an expense.
 

Karnataka’s finances can comfortably support these guarantees. Of the expected revenues of Rs 2.26 trillion in 2023-24 (FY24), an overwhelming Rs 2.13 trillion, or 94 per cent, are Karnataka’s own revenues — from taxes, non-tax sources, and the constitutionally mandated share of the Union government’s taxes as determined by the Finance Commission’s formula.

Karnataka does not survive on the generosity of the Union government. The state’s revenues have been growing at a rapid pace of 13 per cent annually over the past three years, from Rs 1.56 trillion in 2020-21 to Rs 2.26 trillion in FY24. Combined with the borrowing of Rs 78,000 crore this year, Karnataka’s total budgetary outlay stands at Rs 3.09 trillion.

Wouldn’t the ‘five guarantees’ pressure the Fiscal Responsibility and Budget Management Act (FRBM) Act to mandate a 3 per cent fiscal deficit limit?
 

Karnataka’s fiscal deficit and total debt are low and less than half the Union government’s. The Congress has always managed Karnataka’s finances responsibly.

In FY24, the fiscal deficit will stand at 2.6 per cent of the state’s gross domestic product (GDP), and the total consolidated debt level will be 24.2 per cent of state's GDP. These are well within the limits specified by the state FRBM Act.

Clearly, Karnataka’s finances are much healthier than the Union government’s, which is indebted to nearly twice the extent of the state.

In the Union Budget for FY24, the Government of India stated that its fiscal deficit was 5.9 per cent and its debt level was 57.2 per cent of GDP.

The estimated cost of the five guarantees together is about Rs 45,000 crore. This amounts to 1.9 per cent of the state’s GDP of Rs 23 trillion, and 14.5 per cent of the total state budgetary outlay of Rs 3.09 trillion. Taking into account the expected revenue growth of 13 per cent, and the multiplier effects on the state’s economy, it is reasonable to expect that a substantial proportion of the cost of these schemes can be met by growth in government revenue. Even if it is entirely debt-financed, this is not a significant burden on the state’s revenue.

Karnataka’s stellar fiscal performance has also been recognised by the Reserve Bank of India. According to its forecast, Karnataka is projected to reduce its primary deficit — that is, fiscal deficit minus interest payments — to 1.3 per cent of gross state domestic product (GSDP) by 2026–27. This puts the state on track to reach a primary deficit of 1 per cent of GSDP in order to stabilise its debt.

The 15th Finance Commission recommended that states receive 41 per cent of the gross tax revenues collected by the Union government. However, they are currently receiving only 31 per cent. This is due to the increasing reliance of the Union government on cesses and surcharges, which will go up to 25 per cent of gross tax revenue in FY24.

If the BJP is truly worried about the fiscal health of Karnataka, it should fix this loophole and return the state’s legitimate share of tax revenue.