Expenditure Especially Subsidy Control Crucial for Karnataka to Achieve Budget Targets - India Ratings

Chennai, February 25, 2014: India Ratings & Research (Ind-Ra) expects Karnataka’s real economic growth in FY15 to be around 6%, based on the expectation of the state’s nominal growth of 13.89% yoy and an inflation rate of 8% in FY15. The government of Karnataka (GoK) estimates the economic growth to be 5% yoy for FY14 according to the advanced estimates. The agriculture sector rebound in FY14 has failed to inspire the state’s economic growth due to a slump in the industrial and services sectors. Industry growth slowed down to 1.2% yoy in FY14 as against 4.4% yoy in FY13 and the services sector decelerated to 7.2% from 8.4%.
GoK expects revenue receipts to grow 17.79% yoy in FY15 budget estimates (BE) from 20.59% yoy in FY14 revenue estimates (RE). The state’s own tax revenue buoyancy of 0.98x in FY15BE is based on the expected recovery in industrial performance. Non-tax revenue declined 2.7% yoy in FY14RE after contracting 2.96% yoy in FY13. However, the state expects the non-tax revenues to grow 15.91% yoy in FY15. In FY14, grants soared 90.87% yoy and the state expects grants to buttress the FY15BE (35.08% yoy) revenue estimates. In Ind-Ra’s view, grant-led fiscal consolidation could rescue the state’s finances for a short term. However, any long-term reliance will create volatility and is untenable.
The state projects its expenditure to increase by 17.57% yoy in FY15BE as against 23.48% in FY14RE. Select committed expenditure (salary, pension and interest)/revenue expenditure is likely to harden to 38.25% in FY15 from 34.67% FY14RE. Salaries, pension and interest will grow 39.14%, 15.43% and 24.36% yoy, respectively in FY15. State predicts subsidies to shrink 20% yoy in FY15 as against a 26.46% yoy increase in FY14RE. Ind-Ra views a decline in the proportion of selected committed expenditure in the current expenditure and a contraction of subsidies as major factors to achieve FY15 budget targets. Importantly, any slippage in subsidy will alter FY15 fiscal arithmetic.
Major operation and expenditure (O&M) contracted by 14.68% in FY14RE and other O&M growth was limited to 46.94% as against the projected 80.02%. Nevertheless, unlike many states, GoK did not scale down its capital expenditure to achieve fiscal targets. Revenue balance/GSDP accentuated to 0.01% in FY14RE (FY13: 0.36%) and will marginally increase to 0.04% in FY15BE. Fiscal balance/GSDP is likely to be 2.92% in FY15. Although the state has remained within the 13th finance commission (13FC) targets, the recent episode of increasing dependence on the centre for meeting fiscal targets weakens the state’s demonstrated fiscal regime. Ind-Ra believes the state would continue to adhere to 13FC fiscal goals, nevertheless few revenue and expenditure assumptions appear optimistic.
The state has allocated INR62bn and INR7.5bn for free electricity and implementing various schemes to distribution companies, respectively. The state expects urban local bodies and related entities to execute projects worth INR82.3bn through grants, borrowings and internal resources. Ind-Ra believes the development emphasis will propel growth and at the same time upgrade civic services in cities and towns.
Total liabilities/GSDP marginally increased to 22.72% in FY14RE from 22.61% in FY13 and would be at 23.01% in FY15 as against the fiscal responsibility ceiling of 25.7%. The Karnataka Ceiling of Government Guarantee Act, 1999 caps the outstanding guarantees extended by the government at the end of any year at 80% of the state’s revenue receipts of the second preceding year. GoK restricted its outstanding guarantees to 11% of the second preceding year as at FYE13.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)//