India's grand old party has managed to tip the scales in its favor in the recently concluded Karnataka Assembly polls by promising to provide freebies and went on to win with a clear majority in the State last week.

Its victory although comes at a huge cost to the exchequer, and analysts indicate that dolling out freebies will not be sustainable for the new government and may result in economical ill-health. 

Congress in the run-up to elections had given five major guarantees — ₹2,000 monthly assistance to women heads of all families (Gruhalakshmi), 200 units of power to all households (Gruhajyoti), ₹3,000 every month for graduate youth and ₹1,500 for diploma holders (Yuvanidhi), 10 kg rice per person per month(Annabhagya) and free travel for women in the State public transport buses (Uchita Prayana). 

The total cost of all the freebies will amount to ₹65,082 crore a year, according to analyst estimates. ₹42,960 crore for Gruhalaksmi, ₹15,498 crore for Gruhajyoti, ₹5,728 crore for Annabhagya, and ₹896 crore for Yuvanidhi, will be the cost breakup. This is nearly 20 per cent of the State budget. 

‘Not sustainable’

MG Chandrakanth, Retired Director, Institute for Social and Economic Change (ISEC) explains that currently, the fiscal deficit is about ₹60,531 crore, and adding ₹65,082 crore amounts to a total deficit of ₹1,25,613 crore.

This is not sustainable as the deficit goes beyond 3 per cent.

The Gross State Domestic Product (GSDP) for FY24 is ₹23.33-lakh crore, and the total fiscal deficit forms 5.38 per cent of GSDP. But, the Karnataka Fiscal Responsibility Act, 2002, limits the fiscal deficit to 3 per cent of the GSDP. 

He further explained that the excess 2.38 per cent will deter the receipt of several concessions from the Government of India.

“Karnataka which has up until now been an economically healthy State will turn into an ill-health State.  Increased borrowings will have a cascading effect on the present and the future government due to the piling up of public debt,” he told businessline

The Congress government has been upbeat about these promises but is also well aware of the mammoth task that lies ahead of them. After all, the party’s prominent CM face Siddharamaih has presented 13 State budgets so far in his career. 

Randeep Surjewala, Congress Karnataka in-charge has in the past said that the promises would not entail much since it would not cost more than ₹40,000 crore or 15 per cent of the State budget. He also added that the size of the budget is expected to increase over the next five years.  

Three days after the victory, the party is already putting riders to the guarantees. For instance, reportedly, the party will be providing 200 units of free electricity only to those who use 200 or fewer units of power in a month, and the free bus ride is restricted to daily commute routes and only for non-luxury State buses. 

In order to deliver on the promises, the government will either have to increase the collection of taxes and duties or increase borrowings.

Chandrakanth opines, “Government can raise urban property taxes, stamp duty, registration fee, tax on liquor, VAT on petrol/diesel. But they may not attempt this due to political economy issues. Hence the borrowings will increase.”

The outgoing BJP government had presented a revenue surplus budget of ₹402 crore. Currently, Karnataka’s overall liabilities stand at ₹5.6-lakh crore, according to the recent budget, and it was estimated that an additional ₹1.7-lakh crore will also be borrowed.

The State has a revenue surplus and revenue receipts are expected to increase, but would this be enough to sustain the provision of freebies for a long-time is to be watched out for. 

The analyst further explains that the government can only cut costs through a reduction in revenue expenditure which may imply no recruitment.

But having announced a new reservation policy, the new government can’t withdraw it. Thus, on one hand not recruiting for jobs and on the other hand increase in unemployment compensation may lead to inefficiency.