Is Congress's freebie promises in Karnataka weighing heavily on state finances?

The exchange between Congress chief Mallikarjun Kharge and Prime Minister Modi has intensified tensions, following Kharge's call for state units to offer financially viable guarantees amid growing concerns over Karnataka's freebie schemes.

In Short

• Mallikarjun Kharge's advice to Congress sparks BJP criticism
• Karnataka's welfare schemes strain finances
• Foreign Direct Investment in Karnataka declined, investors favour Gujarat

Congress chief Mallikarjun Kharge's advice to state units has become the latest flashpoint between the party and the BJP. It started when Kharge, 82, advised Congress units to promise financially "doable" guarantees. Seizing the moment, Prime Minister Narendra Modi made a scathing attack, calling out the grand old party's "unreal promises", which invited Kharge's "cheap PR stunt" response pertaining to the NDA's 100-day plan.

Karnataka Chief Minister Siddaramaiah and his deputy DK Shivakumar also jabbed the Prime Minister for making false accusations and copying their model. "Who says we are facing financial issues? Our financial strength is stronger than that of the country's strength," Shivakumar told reporters on Saturday.

Karnataka has been accusing the NDA-led Centre of ignoring the state's concerns for months. The state reportedly had sent a delegation during pre-budget discussions to meet Union Finance Minister Nirmala Sitharaman, requesting Rs 5,400 crore, as recommended by the 15th Finance Commission. Then, in July, Siddaramaiah skipped the NITI Aayog Governing Council meeting chaired by PM Modi in Delhi. He said at the time that despite his "earnest efforts" for all-party MPs meeting in the capital to discuss the southern state's financial troubles, the Budget neglected the same.

"We don't feel Kannadigas are being heard, and hence there is no point in attending the NITI Aayog meeting," the Karnataka Chief Minister said at the time.

The financial strain from Congress's ambitious welfare schemes, however, is becoming increasingly apparent in Karnataka. Siddaramaiah, who had championed the programme as a centrepiece of his administration’s social agenda, now faces difficult economic realities. His economic advisor, Basavaraj Rayareddi, earlier voiced concerns that the state’s annual budget — of which an estimated Rs 60,000 crore is tied up in five key welfare guarantees — is limiting funds for essential development works.

Earlier, India Today conducted an in-depth study on Karnataka's economic growth and future prospects.

KARNATAKA'S ECONOMIC GROWTH SLOWS, BELOW NATIONAL AVERAGE

Karnataka’s economic momentum appears to be slowing, as the state’s GDP (Gross Domestic Product), which has consistently outperformed the national average since 2019-20, is expected to decline in 2023-24. With the national GDP growth projected at 7.3 percent, Karnataka's growth rate is estimated at 6.6 percent for the same period.

The state's finances are also a growing concern, with a rising fiscal deficit. In 2022-23, Karnataka’s fiscal deficit was 2.14 percent of its GDP, increasing to 2.67 percent in 2023-24, and estimates indicate it may reach 2.95 percent by 2024-25.

A decline in economic growth can severely impact Karnataka's freebie schemes by reducing tax revenues and increasing demand for assistance. As businesses earn less and unemployment rises, the government collects fewer taxes, limiting its ability to fund welfare schemes.

At the same time, more residents may rely on freebies for support, creating additional pressure on a strained budget. Consequently, the state may have to cut back on or eliminate these schemes, prioritising essential services instead, which can exacerbate financial hardships for those who depend on them.

TAX REVENUE FALLS, CENTRAL GRANTS SHRINK

Karnataka’s fiscal stability is under pressure as both tax collections and grants from the Centre have declined. The state’s tax revenue dropped from 7.54 percent of GDP in 2021-22 to 6.24 percent in 2023-24, according to the state budget. Additionally, central grants fell from 1.22 percent to 0.55 percent over the same period.

The Karnataka Economic Survey 2023-24 highlighted a broader decline in central taxes, which decreased from 2.55 percent of GDP in 2018-19 to 1.45 percent in 2023-24, further impacting the state’s revenue base.

The survey added that the “trend is expected to be similar when we look at the grants from the Centre which has declined from 1.05 per cent in 2018-19 to as low as 0.51 per cent in 2023-24”.

LIABILITIES EXPECTED TO RISE

Liabilities in the state are expected to increase steadily, moving from 22.6 percent of GDP in 2023-24 to a projected 23.77 percent in 2025-26 and 23.97 percent in 2027-28. This could impact the state's ability to fund freebie schemes because higher liabilities mean more debt obligations, reducing the budget flexibility for welfare programs.

FOREIGN INVESTMENT DECLINES

Foreign investors are showing a preference for Gujarat over Karnataka.

Karnataka's Foreign Direct Investment (FDI) inflow has seen a steady decline over recent years. In 2021-22, the state received $22 billion, but this figure dropped to $10.4 billion the following year. By 2023-24, FDI inflows had further reduced to $6.57 billion, according to data from the Department for Promotion of Industry and Internal Trade.

Lower Foreign Direct Investment (FDI) can constrain Karnataka's budget and impact its ability to fund freebie schemes.

FDI brings in capital that can stimulate economic growth, create jobs, and increase tax revenue, which helps governments afford welfare programs.

With less FDI, Karnataka may face slower economic growth and lower tax revenue, making it harder to sustain or expand freebie schemes.

(With inputs by Sagay Raj)