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Is the Congress-led government pushing Karnataka into a debt crisis?

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On Friday, CM Siddaramaiah rolled out the congress schemes that had played a key role in the party’s landslide triumph in the recent assembly elections. He assured the voters with a “guarantee” of implementation of all 5 key welfare schemes within the present fiscal year.

1- Gruha Jyoti providing 200 units of free electricity to households, starting from the first of July.
2- Gruha Lakshmi provides Rs.2,000 monthly assistance to the woman head of every family, the applications, verification, and payments are to pan out by 15th August 2023.
3- Anna Bhagya, offering 10 kilograms of rice to the members of BPL families.
4- Uchita Prayana Guarantee, to allow free bus travel for women within the state in state-run buses from June 11. The scheme excludes AC and luxury buses.
5- Yuva Nidhi Guarantee, to assist unemployed graduates and diploma holders with Rs.3000 and Rs.1500 respectively for 2 years.

An expense of Rs.50,000 crores per year is the estimated cost to fulfill these schemes, this number has triggered conversations about the financial implications this brings to the exchequer.

Sustenance, debt and financial crisis, tax rises, fund crunches, interest rates on government debts, and similar concepts are at debate, in the context of the proposed expenditure.

Deputy CM, D K Shivakumar spoke with India Today, and said, “It’s definitely a burden, no doubt in it. This 40% commission no, if we stop that corruption, it is enough to stop the problem.” As he took a dig at the previous government while answering how the government would fund the welfare schemes.

Gauging the possibilities here, A higher deficit without corresponding growth in the economy could lead to higher taxation, this could be a potential risk as the state’s taxable channels are limited.

The higher deficit could also risk other necessary policies and their implementation due to fund crunches, different government projects, and sectors could suffer if the government fails to implement more pro-growth policies that would produce more revenue and lessen the spending over time. Tax reforms could be expected, bearing a burden on the taxpayer.

Karnataka is the third largest state economy in the country, contributing 8.2% to the country’s GDP. Per capita income in the state has surged 62% with Rs 3.02 lakh in Fiscal year 2023 against Rs 1.86 lakh in Fiscal year 2018.

Karnataka has a fiscal deficit of 2.60% of the GSDP against India’s 5.9% of the GDP. The total liabilities for the fiscal year 2024 are estimated at 24.20% of the GSDP. In the fiscal year 2023, the state performed better at fighting inflation and remained below the national average.

Understanding the numbers above and what they tell us about the state’s economy while considering that this is a post-pandemic, and international tension-influenced economy, the primary deficit of the state could be seen as regular.

The Growth rate of the economy is observed at 7.9% (FY23) while the interest rate of the state’s debt is observed at 1.56% (FY22-23), the economy has been witnessing robust growth and is the second fastest-growing major state economy clocking a CAGR at 7.3%.

It is safe to assume no financial/debt crisis is anticipated anytime soon even with the implementation of the growth schemes based on the numbers. As the markets aren’t predicting a financial crisis, the interest rates are likely to stay steady and not pose a threat to the state even upon a hike in debt.

The growth observed in Karnataka is disproportionate, Karnataka has the second largest per capita income in India, but 36% of the state’s GDP comes solely from Bengaluru (urban) with only a sixth of the state’s total population. The income distribution across the state is incommensurable.

To alleviate the burden of the impoverished in a post-pandemic economy with cost-push inflation, welfare schemes prove to be a beacon of hope to the voters, but only job creation and economic growth can sustain these efforts at a socially responsible development.

Deputy CM D K Shivakumar spoke with India Today, about attracting more investments into the state, by tweaking the policies facilitating ease of business, and mentioned the importance of private players in job creation and economic boost.

If the Congress government manages to pull off their key election manifestos before the upcoming 2024 elections, this could have positive sway on the party’s performance in the MP elections 2024.

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