Karnataka’s next government will have to balance challenges and opportunities

Bengaluru, the state capital, has been reeling under lack of planning and failing infrastructure with huge traffic jams and is facing environmental distress due to open dumping of garbage and waste mismanagement.

While the poll battle in Karnataka is heating up, irrespective of which party wins, the next government will have some colossal challenges in terms of the state’s debt burden, a third of government posts lying vacant, Begaluru’s urban mess, etc. In addition, experts said, the new government will have to look at utilising the relaxations in labour laws and take advantage of ease of doing business reforms to maintain the momentum in investments.

Bengaluru, the state capital, has been reeling under lack of planning and failing infrastructure with huge traffic jams and is facing environmental distress due to open dumping of garbage and waste mismanagement. In its Global Liveability Index 2022, the European Intelligence Unit (EUI) placed Bengaluru at the bottom of the ranking for India.

The city has also been a victim of urban flooding. On August 29-30, 3022, with relentless rains the city was flooded and suffered power outages. The city’s lakes have been mismanaged and encroached upon and interconnectivity between them has been disrupted. The drainage system of the city has also been compromised due to large-scale encroachments. Other items of city infrastructure that have a bearing on floods have been equally mismanaged.

“Opportunities are aplenty, more than the challenges. The next government has to divert investment from urban to rural and district headquarters by developing better connectivity and infrastructure. Then investors will then go to rural areas because it will be cheaper for them,” past president of Federation of Karnataka chambers of commerce and industry Jacob Crasta told Moneycontrol.

India’s silicon valley, Bengaluru generates about 6,100 tonnes of waste every day. The dumping of garbage poses severe environmental issues. Only 33 percent of the households actually segregate their waste. This staggering volume of waste being generated every day will be a challenge.

Huge debt burden

Apart from the woes of the I-T city, a huge debt burden and fiscal pressures await the next government. Government employees have been demanding implementation of the 7th Pay Commission recommendations, posing a challenge to the state’s fiscal health, and red flagged by its finance department. The incumbent Basavaraj Bommai government of the BJP has announced 17 percent interim relief under the 7th Pay Commission for state government employees, which is likely to cost the exchequer Rs 12,000 crore annually. Once the full-fledged recommendations are implemented, this burden could rise to Rs 20,000 crore annually.

The current dispensation has earmarked Rs 6,000 crore for 2023-2024 for implementation of the pay panel’s recommendation.

In 2022-23, state legislative house recordings show that total liabilities crossed Rs 5. 4 lakh crore. The fiscal burden of the last few years may also have been induced by the economic impact of the Covid pandemic and higher interest payments.

The next state government will need to reduce dependency on borrowings while improving non-tax revenue like user charges on water and electricity.

The Karnataka Administrative Reforms Commission even suggested imposing a 1 percent sports cess on property tax across all urban local bodies.

“Karnataka needs a dynamic chief minister else some party may take it back to the 18th century. Karnataka is placed second for highest collection of GST among all states. It has the highest potential after Maharashtra to become the finance capital. It is a knowledge hub. It also needs to reduce corruption in the government, which is as high as 40% of the cost of projects,” Crasta said.

Vacant government posts

The next government will have to come up with a proper plan to fill the 33 percent vacancy in government posts in the state. The contesting parties have all been promising to fill the vacancies but additional funds will be needed to pay salaries, which will only add to the debt burden.

While the 43 departments have 7,69,981 posts, 2,58,709 of them — around 34 percent — are vacant. The primary and secondary education department have the highest number of vacancies, with 25 percent of posts lying vacant. The health and medical education department has 46 percent of its posts vacant, Chief Minister Bommai had told the Legislative Council.

Additional expenses on salaries and full implementation of the 7th Pay Commission, are likely to push up the funding requirement of the new government and may lead to higher borrowing. The fiscal deficit in FY24 is capped at 3.5 percent for states with 0.5 percent conditional borrowing.

Opportunities aplenty

Along with the challenges, there are some opportunities in the form of labour laws easing, the ease of doing business reforms, which have led to improved investment scenarios for MNCs in the state.

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“If politicians after coming to power join hands with the bureaucracy, it means a faster way. Already labour reforms have been done. Now, women employment will get a boost as they are allowed night employment with security. All reforms are in place,” a state government official told Moneycontrol.

Karnataka’s labour laws are now among the most flexible in India, promoting the country’s aims to become an alternative manufacturing base to China.

After amendments to the Factories Act, 12-hour shifts are now allowed and the rules for night-time work for women have been eased. The number of allowable overtime hours have been increased to 145 over a three-month period, from 75, while capping the maximum working hours at 48 per week.

“Due to the Invest Karnataka promotional organisation initiative, a lot of new investment proposals have already been approved by the current government, which have to be taken forward. The government will have to initiate dialogue with investors who have shown interest in Karnataka to see that they are convinced to invest more in the state,” the official said.

Karnataka has seen some big investments in the last five years, including Rs 9,000 crore from Epsilon, Rs 6,002 crore from Exide, Rs 4,100 crore from Toyota, Rs 51,865 crore from ACME Cleantech Solutions, Rs 45,000 crore from Avaada Ventures, Rs 40,148 crore from JSW Green Hydrogen and Rs 34,040 crore from Petronas Hydrogen.

“As a new government will be formed in the state soon, it totally depends on how they take things forward from where the current dispensation left them. Investments from Foxconn are already committed. The momentum of investments should be the same. What the current government has done, it should keep going,” he said.

The state is already at the top in receiving foreign direct investment (FDI) during the April 2021-March 2022 period, with Rs 1.76 lakh crore in investments. It was ranked the ‘Best Performer’ in 2021 by the Department for Promotion of Industry and Internal Trade. The total investments in Karnataka from FY19-23 stand at Rs 4.67 lakh crore. Taiwan-based Foxconn, the world’s largest contract manufacturer for electronics, plans to set up a manufacturing plant later this year in Karnataka. The proposal by Foxconn, entailing a total investment of about Rs 8,000 crore, has been approved by a high-level clearance committee of the state.

“It will be a challenge for the new government to provide handholding support for each and every new company, whether small or big, so that they do not shift to neighbouring states. It totally depends how the new government takes it forward. If they are proactive, nothing can stop investments flowing into Karnataka,” the official said.