Karnataka’s Services Growth Powers Surpluses
The performance of a state government is often judged on the basis of condition of the state economy and the general financial condition. In fact, the two are not mutually exclusive.
IndiaSpend’s Dhritiman Gupta glances through Karnataka’s Budget documents for 2012-13 and finds that for all the political turmoil the state has witnessed in recent years, its finances are stable. The state has managed to grow at good rates and also keep its finances in good condition.
First, a look at Karnataka’s growth rates vis-à-vis the national growth rates.
Table 1: Growth Numbers
| 2007-08 | 2008-09 | 2009-10 | 2010-11 | 2011-12 (AE) | |
| 1. India’s GDP Growth Rates (%) | 9.3 | 6.7 | 8.4 | 8.4 | 6.9 |
| 2. Karnataka’s GSDP Growth Rates (%) | 12.6 | 7.1 | 5.2 | 8.9 | 6.4 |
GDP- Gross Domestic Product, GSDP-Gross State Domestic Product, AE-Advance Estimate
Source: Karnataka Medium Term Fiscal Plan 2012-16
As can be seen from (Table 1), Karnataka has generally grown at rates higher than the national levels, the only major outlier being the year 2009-10. This was primarily on account of the global financial recession.
To understand the state’s growth numbers a bit better, we will look at growth rates across sectors.
Table 2: Growth Rates by Sectors
| Karnataka | 2007-08 | 2008-09 | 2009-10 | 2010-11 | 2011-12 (AE) |
| 1. Agriculture | 12.4 | 2.3 | 3.6 | 13.3 | -2.9 |
| 2. Industries | 10.8 | 5.1 | 0.7 | 6.1 | 3.6 |
| 3. Services | 13.8 | 9.8 | 8.2 | 9.1 | 10.6 |
| TOTAL | 12.6 | 7.1 | 5.2 | 8.9 | 6.4 |
AE-Advance Estimates, Figures are in %
Source: Karnataka Medium Term Fiscal Plan 2012-16
As can be seen from (Table 2), the only sector that has been able to maintain high growth rates on a consistent basis is services. Agricultural growth rate has fluctuated a lot and so has the industrial growth numbers.
Agricultural growth rate in 2007-08 was an impressive 12.4%. It dipped to 2.3 % in 2008-09. In 2010-11, growth was 13.3 % and advance estimates show that agriculture actually slowed down in 2011-12. The effect of such fluctuations is also reflected in the overall growth numbers.
IndiaSpend has previously reported on the necessity of a stable agricultural sector for consistent growth. If we overlook the fluctuations in agriculture, the growth performance of Karnataka has been quite good, even though led primarily by services.
Let us now look at the condition of Karnataka’s finances.
Table 3: Financial Numbers
| Fiscal Indicators | 2008-09 | 2009-10 | 2010-11 | 2011-12(RE) |
| 1. Revenue Account | ||||
| a) Revenue Receipts | 43,291 | 49,156 | 58,206 | 68,398 |
| b) Revenue Expenditure | 41,659 | 47,537 | 54,034 | 65,254 |
| c) Revenue Deficit(-)/Surplus(+) (a-b) | 1,632 | 1,619 | 4,172 | 3,144 |
| 2. Capital Account | ||||
| d) Non-Debt Capital Receipt | 238 | 625 | 233 | 162 |
| e) Capital Expenditure | 10,602 | 13,118 | 15,093 | 15,979 |
| f) Capital Deficit(-)/Surplus(+) (d-e) | -10,364 | -12,493 | -14,860 | -15,187 |
| 3. Fiscal Deficit(-a)/ Surplus(+) (c+d) | 8,732 | 10,874 | 10,688 | 12,673 |
RE-Revised Estimates, Figures in Rs. Crore
Source: Karnataka Medium Term Fiscal Plan 2012-16
From (Table 3), we see that the Karnataka government has managed its revenue account quite well, running surplus over all the years studied. In fact, the surplus has grown from Rs. 1,632 crore in 2008-09 to Rs.4,172 crore in 2010-11. It is expected to be Rs 3,144 crore, according to 2011-12 revised estimates.
What a healthy revenue account has allowed the state is to finance a part of the capital expenditure from the revenue account, thereby allowing productive investments without much debt accumulation. This has allowed the government to control its fiscal deficit and keep it within manageable limits.
Let us now look at the financial numbers in % terms of GSDP to get an idea of how well finances have been managed.
Table 4: Financial Indicators in % of GSDP
| 2008-09 | 2009-10 | 2010-11 | 2011-12(RE) | |
| 1. Revenue Surplus/GSDP (%) | 0.5 | 0.4 | 1.1 | 0.7 |
| 2. Fiscal Deficit/GSDP (%) | 2.8 | 3.2 | 2.8 | 2.9 |
| 3. Total Liabilities/GSDP (%) | 24.9 | 25.8 | 24.9 | 23.6 |
Source: Karnataka Medium Term Fiscal Plan 2012-16
It can be seen from (Table 4) that the revenue surplus-GSDP ratio of Karnataka has hovered between 0.4% and 1.1%. The performance on the revenue account is commendable because Karnataka is one of the few states that records surplus on this account.
If we look at a previous report by IndiaSpend, we see that of the 17 states considered, only seven states recorded revenue surpluses in 2010-11 (RE) and Karnataka was one of those seven states (the others include Bihar, Andhra Pradesh and Uttar Pradesh).
What is noteworthy is that Karnataka has managed its revenue account well on a consistent basis. Other states like Punjab, West Bengal and Kerala have been chronic offenders when it comes to revenue management.
The fiscal deficit numbers have been consistently kept below 3%, except in the year 2009-10. The debt-GSDP ratio has also been kept consistently below 25% except the year 2009-10 when the global recession hit the state economies.
Furthermore, the debt-GSDP ratio has started showing a declining trend. The figure reduced from 24.9% in 2010-11 to 23.6% in 2011-12 (RE). What a declining debt-GSDP ratio will do is reduce expenditure on interest payments, thereby further boosting the revenue account, which, in turn, would make possible higher investments without taking loans.
The worst-performing states like West Bengal and Kerala had debt-GSDP ratios of 37.9% and 30.5%, respectively in 2011-12 (RE). The better performers like Haryana and Orissa had Debt-GSDP ratios of 18.4% and 17.5%, respectively in 2011-12 (RE).
Even though Karnataka lies somewhere in between, it benefits from the fact that the debt-GSDP ratio is declining even while investments rise.
