Sadananda has very few options before him with elections due next year

The fifth State Budget, which will be unveiled on Wednesday by Chief Minister D.V. Sadananda Gowda, can be expected to be as populist as the one preceding it. In allowing Mr. Gowda, rather than his predecessor, B.S. Yeddyurappa, to present it, the party appears to have decided to take collective credit instead of allowing an individual to corner all the glory that populism seeks to garner.

Budgets are generally a here-and-now affair. Rarely does the media or the public track the actual numbers on allocations that are promised in a budget speech. Populism inherently takes advantage of this. When Mr. Gowda presents his budget, it is unlikely that anybody will recall the many promises of allocations made in Mr. Yeddyurappa's “farmers' budget” of 2011-12.

Resource constraints

The reality of the economic situation, however, presents a much more difficult situation for Mr. Gowda, when compared to what Mr. Yeddyurappa faced in the previous two years. First, the recent Union Budget for 2012-13 shows that Karnataka's share of taxes mobilised by the Centre in 2011-12 is lower than what was projected by Finance Minister Pranab Mukherjee last year. It may be recalled that Mr. Yeddyurappa faced much more fortuitous circumstances last year. In 2010-11, for instance, Karnataka received more than its share of taxes estimated at the beginning of that year.

Second, Mr. Gowda may be under pressure not to raise taxes in what is certainly going to be the BJP's last budget before it faces elections next year. This would be in sharp contrast to the headroom for resources that Mr. Yeddyurappa had. Over two years, in successive budgets, Mr. Yeddyurappa raised the generally applicable Value Added Tax (VAT), the most important revenue-raising instrument in the hands of the State, by one and a half percentage points — from 12.5 per cent to 14 per cent. This is likely to constrain Mr. Gowda's options.

Slackening growth

The resource constraint imposed by slackening of Central transfers gives rise to a third set of problems for Mr. Gowda. Data presented in the Economic Survey show that the State's economy has been slowing down. For instance, the growth of Karnataka's Net State Domestic Product (NSDP) fell from 19.06 per cent in 2006-07 to 15.92 per cent in 2009-10, the latest year for which the Economic Survey presented data. Industrial growth in the State was just about half the national average in 2009-10. With industrial production slowing down even further in the current year, and with manufacturing, in particular, bearing the brunt of the slack, Mr. Gowda's realistic options appear limited. A cross section of industrialists who spoke to The Hindu say that merely conducting a second Global Investors' Meet in June would not be enough to convince industry to invest in the State.

Mr. Yeddyurappa's last budget was premised on borrowings increasing by a whopping 133 per cent — from Rs. 7,473 crore (revised estimates for 2010-11) to Rs. 17,416 crore in 2011-12. In other words, his populism was based on an overhang of debt to meet its expenditures. According to Mr. Yeddyurappa's own projections, Karnataka's internal debt was poised to increase from Rs. 5,605 crore to Rs. 13,615 crore — an increase of 143 per cent.

However, it is unlikely that the State's fiscal reality will deter Mr. Gowda from charting a path that is different from that of his predecessor.