V. Sridhar

Bangalore: Chief Minister B.S. Yeddyurappa's third budget reflects the strained nature of the State's fiscal situation. The revenue side of his accounting ledger shows a 4 per cent shortfall in revenues in the current year, when compared to what he had anticipated last year. This apparently mild shortfall would have been far worse if grants extended by the Centre in 2009-10 had not been 30 per cent higher than what Mr. Yeddyurappa had anticipated last year. While taxes mobilised by the State Government fell 10 per cent short of target, Karnataka's share of taxes levied by the Centre were eight per cent below the projected level.

The critical figure in Mr. Yeddyurappa's budget is the anticipated revenues for 2010-11. He hopes to raise Rs. 53,639 crores in the next fiscal, which is 16 per cent higher that the revised estimate for the current year. Revenues from taxes levied by the State are projected to increase by about 23 per cent. The downside risk, which has a bearing on the outlays that Mr. Yeddyurappa has made in his budget for 2010-11, arises from the fact that revenues have not increased at this pace in the last three years. To make matters worse, the additional support he got from the Centre in the form of grants in 2009-10, mainly to enable the State to cope with the unprecedented floods that swept northern Karnataka, will not be available this year. It is significant that grants are projected to decline by 27 per cent in 2010-11.

Given the nature of the fiscal stress, it is perhaps true that Mr. Yeddyurappa had few options to avoid the across-the-board increase in Value Added Tax rates. The bulk of the additional revenue in 2010-11 is going to come from the increase in VAT rates. However, the incremental collections from VAT is going to be a small fraction of the revenue mobilisation effort of the Government.

Cutting exdpenditure

A senior official in the Finance department explained that the bulk of the revenue expected to flow into the Government's coffers in 2010-11 is “dependent on tax buoyancy resulting from the economic recovery.” Asked what would happen if revenues failed to rise as expected, the official said, “If revenues fail to materialise, we will cut expenditures.” This candid admission is an ominous indication of the risk-laden strategy Mr. Yeddyurappa has adopted.

Mr. Yeddyurappa's Plan outlays — proposed and revised estimates in 2009-10 — indicate that he has cut funding for schemes that either expand the productive capacity or promote social inclusion. For instance, the food subsidy, which is a prime means of providing relief to people in these inflationary times, was set at Rs. 850 crore in Mr. Yeddyurappa's last budget. Although the Government incurred an expenditure of about Rs. 890 crore, the magnitude of this expenditure was 17 per cent lower than the Government's food subsidy bill for 2008-09. In fact, the food subsidy for 2010-11, at Rs. 1,250 crore, is only marginally higher than what the Government spent two years ago, in 2008-09.

In his last budget Mr. yeddyurappa had proposed a substantial increase in Plan outlay — to Rs. 29,500 crore. However, the revised estimates show that the actual outlay in 2009-10 was only about Rs. 22,000 crore. He now plans to increase the outlay to Rs. 31,000 crore, but whether this will materialise will depend critically on whether the State has the revenues to fund its promises, plans and schemes.