Starting off on the right foot

Increase in capital outlay in the 2016—17 Karnataka budget is a good sign for the state

by Varun Ramachandra (@_quale) and Pranay Kotasthane (@pranaykotas)

[Note: This article first appeared in the Kannada newspaper Prajavani on 19th March 2016]

The 2016—17 Karnataka state budget was much awaited for two reasons. One, in 2015—16, Karnataka and other states had little time to respond to several important changes affected by the 14th Finance Commission recommendations. These changes had resulted in a 61% increase in unconditional transfers to Karnataka on one hand, and a decrease of nearly 50% in grants for centrally sponsored schemes on the other. Since these changes happened very close to the budget date, Karnataka could only make incremental changes last year.

Secondly, 2016—17 is the only election-free year for Karnataka. The three previous years had elections at state, union and important local government bodies respectively while next year’s budget will have to factor in the 2018 state elections. An election-free year means that the government can afford to depart from marginal changes and take decisions that might not be populist, but are nonetheless necessary for long term welfare.

So, given the importance of this budget, how did the Karnataka government fare on important areas this year? This article analyses the budget in the backdrop of this unique opportunity.

How did Karnataka’s earnings change?

The Finance Minister accounted for an increase of 11 percent in Karnataka’s own tax collections, which primarily come from taxes on sale of goods (VAT), alcohol and land duties. There was also an increase of 12 percent in Karnataka’s share of taxes collected by the union, taking the unconditional transfers received from the union to a total of 26,978 crores. Note that this number had already increased by 61% last year, as a result of 14th Finance Commission recommendations.

A big change this year was that Karnataka has budgeted for a significant increase in the loans to be borrowed from markets. This was made possible, without any change in the fiscal deficit because of a change in methodology for estimating the state’s GSDP, abruptly changing it from 7.36 lakh crores in 2015-16 to 12.13 lakh crores in 2016-17. The new methodology gives higher weightage to the IT sector’s contribution, a sector that Karnataka excels in. Since the permissible borrowing limit is calculated as a fixed percentage of the GSDP, a higher GSDP allowed the government to borrow more from the open market.

But aren’t loans always bad? Not necessarily, it depends on what purpose the loaned amount is spent on. Generally, deploying borrowed money towards long-term asset creation can have a positive impact.  

How did Karnataka’s spending change?

On the spending side, there was a 21 percent increase in the capital expenditure (money spent on asset creation) at Rs. 26,341 crores and an 11 percent increase in the revenue expenditure (money spent to meet short term expenses such as salaries) amounting to Rs. 1,30,236 crores. The areas of urban development, irrigation & flood control, police, and crop husbandry saw major increases in allotments.

The continued increase on capital and revenue expenditures for irrigation and flood control shows us that agriculture continues to be the priority area for this government and that it is willing to focus on both long-term asset creation and meeting short-term expenses in this area. Second, there is an increase in expenditure outlay for water supply and sanitation but most of this increase is towards meeting running expenses with only a small jump of about 10 percent towards capital expenditure. Third, there is a doubling of capital expenditure on social security and welfare. Finally, there seems to be a new found focus on urban development with an increased capital outlay of 1886 crores compared to 365 crores last year.

It is heartening to see that significant portions of the increased borrowing  has been utilised for long-term asset creation. At the same time, it was disappointing that only marginal changes were made in allocations towards health and education — essential services for a state like Karnataka that aspires to reap the demographic dividend.

Varun Ramachandra (@_quale) and Pranay Kotasthane (@pranaykotas) are researchers with the Takshashila Institution.

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