Karnataka finances remain sound

Political turmoil unlikely to impact bottomline.

Political turmoil notwithstanding, Karnataka's financial position continues to be sound. Going by the performance in the first half of the present financial year (April-September), the Karnataka government is on track to meet the broad targets set in the budget estimates for 2007-08.

This is a bit of an achievement as this year July onwards the state exchequer has had to make do with the revenue implications of the ban on the sale of arrack. Through that the government was set to forego revenue of Rs 1,300 crore but the reality has turned out to be different and better.

The state is, in fact, the beneficiary of an unintended consequence of the ban, admits M R Sreenivasa Murthy, principal secretary, finance department. There has been a "substitution effect", with arrack drinkers shifting to IMFL, as branded Indian liquor is called.

As a result, state excise collection, accounted for by alcohol sales, is likely to register only a nominal growth or marginal shortfall, that is faring much better than the sharp drop projected in the budget estimates.

One result of this is that plan expenditure in the present year is likely to grow around the same rate as last year, that is the slowdown in the growth rate foreseen in the budget estimates, from 47.8 per cent in 2006-07 over the previous year to 8 per cent projected for the next year (07-08), is unlikely to happen.

The state government is optimistic about its budgetary estimates mainly because the main source of state tax revenue, commercial tax collection under which VAT is accounted for, has been as projected. In fact VAT growth in Karnataka will be one of the highest in the country, asserts Murthy.

The only tax head which is likely to underperform vis-à-vis budget estimates is 'stamps and registration'. This is because interest rate volatility which afflicted housing loans earlier in the year led to a deceleration in the registration of apartments.

'Bonuses' from the Centre for being a good boy in terms of fiscal responsibility will be about the same as last year when the state earned Rs 358 crore.

The state's financial performance in the next six months may well benefit from the latest political developments which have led to the imposition of President's rule and dissolution of the assembly.

Typically, during President's rule an administration goes about its routine functions more purposefully as there is no political executive overseeing it.

Murthy asserts that he will use the interregnum to concentrate on "housekeeping" through a rigorous review of performance. This can result in a stricter monitoring of expenditure as well as tax collection.