Karnataka does smart fiscal math & ups investment
This is an example of a #StatesMatter budget analysis piece.
First published in Times of India on March 19, 2016.
Chief Minister Siddaramaiah presented the Karnataka Budget today, where the state plans to spend over Rs 1.6 lakh crore in the coming year. This translates to over Rs 23,000 of spending per person in Karnataka, a full 15%-16% increase over the last year’s budget.
This dramatic increase is made possible because the state increased its borrowings by about 47% to Rs30,000 crore this year. Unlike the Centre, states usually have harder restrictions on reckless borrowing. It is interesting that Karnataka managed to maintain its fiscal deficit at 2.1% — well within prescribed guidelines — but borrow more nevertheless.
This extra borrowing is made possible because of changes in how the size of Karnataka’s economy is calculated. The state’s GDP — known as the GSDP — involves complex estimations, and the estimation methods are revised every few years to reflect the evolving economy. Siddaramaiah and his government have long been claiming thatKarnataka’s IT sector outputs are not fully reflected in the state GSDP numbers, resulting in an underestimate. This was corrected this year — and Karnataka now contributes 7% of India’s economy, as opposed to 5.5% earlier. Since the size of the economy changed, how much the government could borrow changed proportionately.
Much of this increase in the Karnataka budget has been devoted to capital expenditure — investment in assets that will yield value over many years. This is prudent and important at a time when private sector growth has been slowing down. It would have been tempting to spend the extra resources on subsidies and other expenditure — and it is to the government’s credit that this has not happened.
Karnataka’s capital outlay is about Rs25,700 crore of investment, almost Rs5,200 crore higher than last year.
This has been used to increase the irrigation investments by Rs2,000 crore — likely to aid drought-affected farmers in the medium and long term. It is unclear whether greater irrigation investments translate easily into better outcomes for farmers, but this has to be watched carefully. It is also unclear whether the government has the capacity to spend these extra funds in time.
The Karnataka government has also sharply increased investments in urban development by Rs1,500 crore. This is a welcome move and a long overdue nod to the requirements of cities and towns. Over the year, the state will also need to devolve more responsibilities to the cities and build competence in them so that they can use these resources effectively. Apart from this, there are healthy additional investments in police, social welfare, tourism and public works.
Overall, the Karnataka budget is of modest ambitions. There are no dramatic reforms or radical restructuring of avoidable government subsidies. But the chief minister has kept populist concerns at bay and directed most of the new expenditures towards investments. Careful implementation and follow-through can ensure that these investments result in a more prosperous Karnataka.
