Karnataka remains fiscally prudent

Tradition of revenue surplus, under 3 per cent fiscal deficit maintained.

Karnataka's finances remain sound with the state government under President's rule presenting its third surplus budget projecting a primary surplus of Rs 1,648 core and a revenue surplus of Rs 2,973 core for 2008-09.

The state also remains within the ambit of its Fiscal Responsibility Act with its fiscal deficit projected at 2.84 per cent of the gross state domestic product (GSDP), within the stipulated 3 per cent, a feat that has been maintained for four years now since 2004-05.

The GSDP is calculated on the assumption of a 9 per cent real rate of growth and 4 per cent inflation in 2008-09. In reality, a higher rate of inflation may be compensated by a lower real rate of growth, keeping the nominal GSDP in line with the projection.

But it remains to be seen if revenue buoyancy will be maintained in light of no fresh taxes being levied during President's rule and slower growth of disposable income in the coming year because of the slowdown in the software sector. Most of the state government's main source of revenue, commercial tax, comes from consumer expenditure in the Bangalore urban area driven by IT salaries.

However, in the present year the state seems to have achieved fiscal consolidation at the cost of development. Plan expenditure in the present year (2007-08) is slated to go up by a minuscule 2.4 per cent over the previous year (2006-07), in sharp contrast to the 49 per cent rise achieved in that year over 2005-06.

Considering that Karnataka is by no means one of the top scorers among states in terms of human development (it ranks seventh among the major 15 states) and has several extremely backward districts, this near-stagnation in nominal plan expenditure and fall in real plan expenditure is likely to lead to greater income equality between the Bangalore region and the rest of the state.

Plan expenditure has stagnated despite the state's revenue receipts (including central devolution) going up by 8.7 per cent and its own tax revenues going up by 16.8 per cent in the present year (2007-08). Non-plan expenditure has gone up in line with tax revenues by 17.5 per cent. The budget for the coming year (2008-09) has however projected a sharp rise of 20 per cent in plan expenditure and a rise of 15.5 per cent in its own tax revenues.

To maintain Karnataka's reputation as one of the leading states in devolving resources to the panchayati raj institutions, this is slated to go up by 15.2 per cent in the present year and is projected to rise 23 per cent in the coming year (2008-09) to Rs 13,246 crore.

This appears to have been made possible partially by reining in one of the main channels of revenue drain - explicit subsidy to the power sector. This has actually come down in the present year to Rs 1,950 core from the previous year's high of Rs 2,369 core and is projected to go up only moderately to Rs 2,060 core in 2008-09.

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Budget estimates vs revised estimates for 2007-08

State Excise Duty higher by Rs 1,368.59 crore

Motor vehicles revenue higher by Rs 246.00 crore

Revenues from Stamp Duty short by Rs 587.50 crore

Commercial Taxes short by Rs 500 crore

Non-plan expenditure short by Rs 442.77 crore

Plan expenditure short by Rs 833.92 crore

Reduced expenditure on salaries and pensions

More Capital Expenditure on Irrigation & Public Works