The Hindu Business Line : Fiscal reforms take a back seat in Karnataka

During the last financial year, the Government faced with mounting expenditure on account of the drought, which had resulted in the fiscal deficit overshooting the estimates.

Bangalore , Feb. 20

FISCAL correction in Karnataka has taken a break this year with the State Government preoccupied with the elections expected to be held in either April or May.

Sources said here that power subsidies for the current year are estimated at Rs 1,935 crore, which is at least Rs 300 crore more than the estimates made in the medium-term fiscal plan (MTFP). The MTFP document has been prepared in consultation with the World Bank, which has been assisting the State in its fiscal restructuring efforts.

As a result, the bank has not released the third tranche of the fiscal restructuring loan, amounting to about Rs 1,300 crore due to failure of the State Government to comply with the prescribed milestones. This year also, failure to comply with the milestones would mean that the tranche would be withheld for the third time, sources said. The prescribed milestones include complete restructuring of the power sector to improve transmission and distribution losses.

Transmission and distribution losses in the State are among the highest in the country at about 30 per cent. The bank had prescribed that these losses be brought down to manageable levels, so that the cost of supplies is fully recovered. Unbundling of the distribution and privatisation was just one of the prescriptions. The sources said that the State Government had in the past chosen the softer option of increasing tariffs to cut the revenue deficit of the power sector.

In fact the power sector contributes to almost 55 to 60 per cent of the fiscal deficit in the State. During the last financial year, the Government faced with mounting expenditure on account of the drought which had resulted in the fiscal deficit overshooting the estimates. The fiscal deficit for 2003-04 is estimated at about Rs 8,000 crore.

Besides, the sources said that the revenue buoyancy in the States has also deteriorated considerably. Revenues as measured by the gross State domestic product (GSDP) is estimated at 7 per cent against the national average of about 9 per cent.

But multilateral institutions have contested even this figure. The main contention is that the GSDP figures are over estimated. The State Government had claimed a real growth in SDP of about 6.2 per cent, which is almost consistent with the figures mentioned in the MTFP. However, this financial year, according to the State Government, was a drought year. This implied that agriculture, which comprised almost 60 per cent of the State's output, has faced shortfalls. The high rate projected by the Government would imply industrial and the services sector growth rates have neutralised farm sector shortfalls. This has not happened during the year.

Industrial sectors also had a much lower growth rates than estimated. This is entirely on account of shortfalls in power availability during the year. Peaking deficit this year is estimated at 2,500 MW this year. Consequently, the sources estimated that the real SDP growth rate for the year was unlikely to exceed more than 4 per cent, which is considerably lower than the State's own estimates. This would imply a SDP figure of around Rs 1,28,000 crore.

A lower GDP would imply that all the fiscal estimates made by the State Government would undergo a complete change for the year. On the flip side, it would mean that the tax buoyancy has actually improved in Karnataka. This increase has, however, pushed up collection of tax arrears and therefore not sustainable, the sources added.

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