'Economy may grow 8.5% in FY12'

The gross state domestic product (GSDP) of Karnataka is expected to grow 8.5 per cent during the present fiscal 2011-12 as against the advance estimates of 8.2 per cent during 2010-11. This is in line with the growth of the GDP, which is set to grow 9 per cent during the year.

According to the medium term fiscal plan (MTFP) for 2011-15 released by the state government recently, the pace of growth during the year 2010-11 was stronger than anticipated at the beginning of the year. “Going forward, there are indications that the Indian economy will continue to have broad-based and robust growth, putting it back on a high growth trajectory, with the services sector continuing to lead the growth momentum.”

 

However, the volatility in commodity prices, which started in 2010-11, is likely to continue in the short to medium term. Karnataka’s economy is not immune to the change in the global commodity prices, particularly of food and fuel, which can slowdown the rate of growth.

The MTFP has identified many key challenges for Karnataka on its way to achieving an 8.5 per cent growth rate during fiscal 2011-12. This year onwards, the limit on fiscal deficit will again be 3 per cent of the GSDP as originally enacted through the Karnataka Fiscal Responsibility Act (KFRA). The reduction in the fiscal deficit limit, from the permitted 4 per cent in 2009-10 to 3 per cent from 2011-12 onwards will constrain the state’s ability to finance capital expenditure.

Presently, Karnataka has one of the highest per capita plan expenditure in the country. During 2011-12 it is expected to be Rs 6,345.

The state may face difficulties in further increasing its own tax revenue to GSDP ratio. The state govern-

ment has consistently recorded the highest own tax revenue to the GSDP ratio in

the country. This was possible through better enforcement, institutional reforms and monitoring besides the use of information technology tools. Sustaining the growth in taxes at the level comparable to the past will be a challenge mostly because the marginal increase in taxes from a high base will be lower.

The services sector’s contribution to the GSDP is not only the highest at 54.9 per cent but is also growing at a faster rate. Slow-growing sectors like agriculture and manufacturing need more public investment and public policy support to accelerate growth. In the absence of any effective fiscal tools it is a challenge to the state government to derive any fiscal advantage of the ever growing services sector, the MTFP said.

The ratio of non-tax revenue to the total receipts has been continuously declining over the years. Further, the state has one of the lowest non-tax revenues to the GSDP ratios in the country, though it is showing some improvement. Apart from the enforcement and monitoring of own tax efforts, special emphasis needs to be given to mobilising non-tax revenues during the coming years.

The MTFP has also highlighted that the state needs to enhance efficiency of expenditure by reducing unproductive expenditure. Another major challenge is that of raising the productivity of important crops and raising the output per worker.

For the 12th Plan period (2012-2017), assuming an 8 per cent real growth in state’s revenue receipts, the Karnataka Vision 2020 seeks an investment of Rs 6,99,850 crore (in 2006-07 prices) while the availability of public resources is projected to be Rs 4,27,283 crore. The estimated gap is Rs 2,72,567 crore and leveraging private funds for public needs is a challenge. The government needs to adopt the PPP model in the policy framework for infrastructure investments.

“With the committed expenditure being very high, raising the resources to meet the goals set in Vision 2020 for the 12th Plan period would be the biggest challenge during the present MTFP period,” the plan added.