The Karnataka government passed an amendment to the Karnataka Fiscal Responsibilities Act (KFRA) for the 2020-21 fiscal to increase the fiscal deficit limit to 5%, amidst a heated debate where opposition leaders walked out of the Assembly. The Bill was proposed in the Assembly on Thursday by Law and Parliamentary Affairs Minister JC Madhuswamy.
In essence, the fiscal deficit is the difference between the government’s income and expenditure. If the fiscal deficit is high, the government is spending more than what it receives.
The amendments to the KFRA includes the following:
In addition, the amendment passed also says that the debt ceiling can be increased as and when required if an extraordinary circumstance arises. JC Madhuswamy had said that the pandemic and its fallout regarding the state's financial situation were "extraordinary circumstances".
The fiscal deficit was kept below 3% to ensure that the state’s financial health remains intact. When the government borrows more than it can afford to pay back, the opposition says that it will be hard to recover financially.
Borrowing based on budget estimates rather than actual figures could be detrimental to the state as the state has had negative growth. It could result in the government borrowing more than it could afford to.
Revenue expenditure is what the spending on salaries of government employees, interest on loans taken, pensions etc, which forms fixed expenditure. By increasing this, there would be very little flexibility for developmental projects.
The opposition says that the high government expenditure will have a negative impact on savings and will impact the growth of the state. This can also lead to a spiralling effect, where private investment could drop due to bad ratings and also put upward pressure on interest rates. The opposition claims it could take years to recover and the delay in adjusting the fiscal deficit does not speak well of a government’s economic management.
Raising the limit to 5% goes against the recommendations of the Medium Term Fiscal Plan recommended by the 11th Finance Commission. The commission's recommendations, which were enacted in September 2002, says the fiscal deficit cannot exceed 3% of the Gross State Domestic Product (GSDP).
The 11th Finance Commission proposed keeping the fiscal deficit lower than 3% in order to maintain the financial health of the state and to also enhance the scope of developmental activities.
In September 2002, the state government enacted the KFRA, which gave legislative and statutory backing to the 11th Finance Commission's Medium Term Fiscal Plan. This Act was amended in 2014 to include borrowings by Public Sector Undertakings and SVPs, where the principal and interest were to be paid out of the state's budget.
The Opposition argued in the Assembly that amending the KFRA would be detrimental to the state's financial condition, and it would take years before the state government recovered from the blow.
Karnataka has consistently maintained its fiscal deficit below 3% except for 2009, when the then Yediyurappa-led BJP government requested the Manmohan Singh government at the Centre to allow raising the ceiling to 3.5% due to drought.
Over the last five years, Karnataka has complied with the KFRA, and in FY 2019-20, the state's fiscal deficit stood at 2.55%.
Former Law and Parliamentary Affairs Minister Krishna Byre Gowda, who was also a member of the Goods and Services Tax (GST) Council, vehemently opposed the amendments, maintaining that the state’s financial condition has been good and it manages its fiscal responsibilities well.
"Such a situation is changing. You (ruling party) are about to change the financial situation so drastically that we would have to face terrible times for the next 10 years," he said.
As per the 11th Finance Commission's recommendations, borrowings cannot exceed 25% of the GSDP. Krishna Byre Gowda said that the state government was not being cautious about the seriousness of the issue and the economy would "blow up in smithereens".
"In 2020-21, the state's debt was Rs 33,820 crore. In addition, revenue expenditure including salaries, pensions, interest, amounts to Rs 87,718 crore. Together it is close to Rs 1,10,000. This is 45-50% of the state's revenue. All this is non-development expenditure. The revenue expenditure has now been increased to 60% of the total budget. What will be left for development?” Krishna Byre Gowda said.
Leader of Opposition Siddaramaiah slammed the government, saying that the budget estimates were proposed before the pandemic, and that they are going to borrow on a figure that was estimated at the time even though the state saw degrowth in the first quarter.
"The overall growth rate will reduce by 12-13% compared to previous years considering the state of the economy. If you want to use the Rs 18 lakh crore projected revenue and based on that if you want to decide the ceiling on fiscal deficit, then that is wrong. Borrowings should be based on actuals and not on projected revenue. If the GSDP shrinks, then the total borrowings will increase drastically," Krishna Byre Gowda argued.
The revenue deficit for the 2020-21 fiscal is pegged at Rs 65,262 crore. The fiscal deficit for 2019-20 was 2.55%. This is due to reduced amounts allocated by the Union Government in terms of devolution of taxes, Union government grants and the lack of GST compensation. The Centre gave states two options as it couldn’t pay out the GST revenue shortfall. The state government chose the option to borrow from the market to compensate for the reduced revenue, and in order to borrow, the government had to amend the KFRA.
Under the GST structure, the cess is levied on luxury, sin and demerit goods and the proceeds from the same are used to compensate states for any revenue loss. Krishna Byre Gowda suggested that the Union government borrow based on guarantees of the revenue collected by the GST Council and distribute it to the states.
"Promise us that the revenue expenditure will be reduced to 40%. If this does not happen, future governments will only have money enough to pay salaries and the interest on borrowings and in future we may have to borrow money to pay the salaries too. We request you to borrow based on the actual GSDP size, and it should be limited to 25% of the state's actual GSDP. We should procure the shortfall from the Centre ideally and not borrow at any cost and we want this promise too," Krishna Byre Gowda added.
Tourism Minister CT Ravi, Revenue Minister R Ashoka and Law and Parliamentary Affairs Minister JC Madhuswamy accused Krishna Byre Gowda of politicising the issue. A heated argument broke out, where Siddaramaiah accused the government of ruining Karnataka's financial health.
The opposition leaders got up from their seats when Speaker Vishweshwar Hegde Kageri put the Bill to vote. Since the ruling party had the majority, the amendment was passed and the opposition walked out.