Business Education

Financial jugglery won’t help Karnataka in the long run

Written by PaperDabba

Promises, especially those made during the run-up to the elections, can turn out to be the proverbial noose around the party’s neck when it comes to power.

But Karnataka Chief Minister HD Kumaraswamy has been smart enough to get around the issue by resorting to good old financial jugglery. Also, the fact that his predecessor Siddarmaiah left the State finances in good shape before relinquishing power gave Kumaraswamy enough fiscal space to at least partially keep his promise.

The art of jugglery

Firstly, he reduced the size of the farm loan waiver from the promised ₹52,000 crore to around ₹34,000 crore.

Secondly, the loan waiver will now be spread over a period of four years, and if one takes into account the conditions tied to the loan waiver, the entire amount almost gets reduced to half, that is, around ₹15,000 crore.

Under the terms laid out in the State budget, the families of government officials and the officials of the co-operative sector and those farmers who have paid income tax for the past three years are excluded from the farm loan waiver.

Higher taxes

Kumaraswamy expects to make good the fiscal shortfall by increasing taxes on the prices of petrol, diesel, liquor and power.

But lenders to farmers will have to wait for four years to get back the entire amount.

Such financial jugglery may help in the short term, but analysts say it can have political ramifications, especially in the run-up to general elections next year.

There are other worries that the Chief Minister will have to contend with in the short- to medium-term.

State coffers

According to Anuradha Basumatari, Associate Director, Public Finance, India Ratings & Research, the waiver of farm loans, in combination with the persistently high level of committed expenditure, will limit the State’s ability to rationalise expenditure and achieve a higher surplus in its revenue account.

“The government has provided ₹6,500 crore in FY19 budget towards loan waiver. However, in case revenue receipts expenditure exceeds the budgeted amounts, this will exert pressure on the fiscal deficit,” Basumatari told BusinessLine.

When Siddaramaiah resigned from the chief ministership, he had left the State in good financial health. Karnataka’s fiscal deficit for 2018-19 was projected at ₹35,127 crore or 2.49 per cent of GSDP, which is within the 14th Finance Commission’s prescribed limit of 3.3 per cent.

“The Siddaramaiah government did borrow a bit, but there was space for further borrowing. The data we have does not show a debt burden,” Kshitija Joshi, a professor at the National Institute of Advanced Studies, said.

A crown of thorns

But this time around, the State will have to resort to borrowings to fund its fiscal deficit because of the small size of its revenue surplus.

There is a good possibility that there could be a deviation from the budgeted capex to meet fiscal deficit/GSDP target in case Karnataka underachieves budgeted revenue receipts and expenditure targets.

The JD (S), to which Kumaraswamy belongs, may have reckoned that by retaining the Finance portfolio, it has been able to score a major victory over its alliance partner, the Congress; but it will be quite a task for it to keep the State finances healthy.

The Chief Minister will now have the arduous task of finding additional resources to fund core infrastructure sectors such as education, health, sanitation and urban development, areas which entail huge capex.

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