Can Karnataka afford Congress' Rs 50,000 crore worth of promises?

The Congress' pre-election promises will cost Karnataka around Rs 50,000 crore.

The Congress' stunning victory in Karnataka has given the party a shot in the arm ahead of assembly elections in the key states of Rajasthan, Madhya Pradesh, and Chhattisgarh later this year and the Lok Sabha elections in 2024. Talk of using the 'Karnataka blueprint' elsewhere has already begun. However, the promises made in the blueprint must first be kept.

Speaking to Moneycontrol on May 13 even as Congress kept racking up seat after seat, National Spokesperson Rajeev Gowda said the math behind the party's pre-election promises was robust.

"The amount it totally comes to is less than Rs 50,000 crore. It is eminently doable in a state like Karnataka, which is one of the fastest-growing economies in the country," Gowda said.

Two of the three claims made by Gowda are, at first glance, correct. One, Karnataka is indeed one of the fastest growing states and is expected to clock a growth rate of 7.9 percent in 2022-23 as against India's GDP growth rate of 7 percent. Second, the figure of Rs 50,000 crore has found general acceptance, with even the Bharatiya Janata Party's Amit Malviya tweeting on May 15 that the Congress' 'five guarantees' will set the exchequer back by Rs 51,150 crore.

But how accurate is the third claim, that putting the promises into play is eminently doable?

The five guarantees

The Congress gave the voters of Karnataka five guarantees, assuring them that they would be approved in the first meeting of the state cabinet.

First, all households will get 200 units of electricity for free. Second, jobless graduates and diploma holders will get an unemployment benefit of Rs 3,000 per month and Rs 1,500 per month, respectively, for two years. Third, Rs 2,000 per month will be given to the woman heading a household. Fourth, every member of a family below the poverty line will be given 10 kilograms of free foodgrains. And finally, women will get to travel for free on regular state transport buses.

The Congress was not alone in making pre-election promises, with the BJP, Janata Dal (Secular), and the Aam Aadmi Party all announcing generous benefits should they come to power.

The cost of Congress' promises is 2.2 percent of the state's GDP in 2022-23. However, the numbers that really matter are the government's receipts. And this is where matters get a little tricky. As per provisional data, the Karnataka government's total receipts, excluding net borrowings, amounted to Rs 2.27 lakh crore last year. So, the Congress' guarantees would have accounted for 22 percent of the state government's total revenue in 2022-23.

According to Lekha Chakraborty, professor at the National Institute of Public Finance and Policy, the emphasis on social security measures is laudable. But the key challenge is finding the fiscal room for them.

"…in times of war and macroeconomic crisis, emphasising on four aspects – food security, social security, social infrastructure, and 'employer of last resort' measures — is very crucial," Chakraborty told Moneycontrol.

"We cannot find fault if Congress has emphasised on these four components. However, how they finance the deficits in the medium term is crucial to watch," she added.

Karnataka's fiscal status

It can't be denied that Karnataka's finances are healthy. As per a June 2022 analysis of state finances by Reserve Bank of India (RBI) staff, the "stellar fiscal performance" of five states, one of which is Karnataka, will help in reducing the debt-to-GDP ratio of all states by 2026-27.

Per the forecasts of the RBI staff, Karnataka's primary deficit — defined as the fiscal deficit minus interest payments — is seen at 1.3 percent of its GDP in 2026-27, only marginally higher than the 1 percent level that would stabilise the state's debt.

However, it is worth pointing out that the state's primary deficit in 2021-22 was also 1.3 percent of its GDP. Further, its fiscal deficit was 2.8 percent, while interest payments amounted to 14.3 percent of revenue receipts — well below Punjab's 21.3 percent but higher than Odisha's 4.3 percent. So, perhaps, the margin for error is not very large.

Eminently doable?

According to Congress' Gowda, the party's promises are necessary so that those who are falling behind have the safety nets to "start thinking about investing in their future rather than worrying about basic survival."

While necessary goods and services should be provided, their cost cannot be ignored. Again, Gowda is confident. "I don't think you have to be particularly concerned about the fiscal math. We have got that covered," he said on May 13.

K Jairaj, former additional chief secretary of Karnataka, is not so sure.

"If you are well-funded and are flush with money, you can do all this. But if the decision is between, for example, subsidised bus travel and money for rural schools, what do you go for? At the margin, there is always a trade-off. You can have an economic rationale even for freebies. But there are constraints," Jairaj said.

One route the Congress could take, Jairaj told Moneycontrol, was to implement the promises in phases. At the same time, the incoming government will need to focus on boosting revenues, exploring options for expenditure reduction, and establishing the fiscal reality through a white paper on the state's finances.