A. Srinivas

Bangalore, July 20 The Karnataka Budget for 2008-09 has based its fiscal deficit and revenue deficit estimates on a 7 per cent real rate of growth of the gross State domestic product (GSDP). This is no different from the real rate of growth of the State economy in 2007-08.

The nominal rate of GSDP growth in 2008-09 has been pegged at 12.7 per cent. According to an official in the State Finance Department, “Inflation is expected to come down from present levels.

“When calculated on a point-to-point basis, inflation is above 11 per cent. But a year-on-year approach gives rise to another picture. An inflation rate of about 5 per cent can be expected down the line.”

At present, inflation in Karnataka, measured on the basis of movements in the consumer price index, is above 7 per cent.The modest estimate seems realistic in view of the prospects of a US-led economic slowdown, which can impact the export-led services sector. However, weak monsoons so far in the State could hit agriculture and drag down GSDP growth, making fiscal deficit and revenue deficit targets harder to achieve unless tax revenues remain buoyant.

It is hard to delink tax buoyancy from growth in a State like Karnataka, where the correlation between the two has been high in recent years. It works out to 0.95 for the period 2004-05 to 2007-08, which means it is important to get the growth estimate right.

Revenue targets

To achieve revenue targets even when growth falls short of projections, the government has raised levies on income-inelastic goods, such as liquor. Therefore, the finance department official said, “Changes in rates are also an important means to meet revenue targets”.

The correlation between economic growth and tax buoyancy is not as strong for the entire country. Higher growth does result in higher tax revenue, but the extent of increase cannot be predicted.

GDP increased by 8.5 per cent in 2003-04, but the combined tax revenue of the Centre and States went up by 10.4 per cent. However, a GDP growth rate of 7.5 per cent in 2004-05 raised tax revenues by 19.4 per cent.

The GDP growth figures for 2005-06 and 2006-07 were 9.4 per cent and 9.6 per cent, respectively, but the corresponding rise in tax revenue was 20.4 per cent and 17.4 per cent, respectively. The official said, “the correspondence depends on the sectors driving the growth”.

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(This article was published in the Business Line print edition dated July 21, 2008)
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