Rs 9.5 crore fee for 6 months: Inside the terms of Karnataka govt’s deal with Boston Consulting Group

Many criticised the Siddaramaiah government's decision to appoint a private consultant

Under pressure to mobilise Rs 50,000 crore-Rs 60,000 crore annually to implement five poll guarantees and fund development projects, the Congress-led Karnataka government recently roped in Boston Consulting Group (BCG) as a consultant to help with suggestions to boost its revenue. Moneycontrol looks at the state government's decision, the scope of BCG’s work and the controversies surrounding it.

Why did the govt hire a private consultant?

In March 2024, the Karnataka finance department invited Expression of Interest (EoI) from leading consulting firms to unlock the state's revenue potential.

The consultant's tasks included identifying initiatives to enhance both tax and non-tax revenues, trim expenses, explore innovative funding sources, foster public-private partnerships (PPPs), utilise technologies to plug leakages, and monetise assets. Focused interventions will target four key departments: irrigation, energy, public works, and rural development, while also exploring new revenue sources in departments, such as mining and forests.

Also, read: After five poll guarantees, Karnataka to hire private consultant to increase tax collection & plug leakages

MC Explains

How much is the state government paying to BCG?

While three private firms—BCG, KPMG, and E&Y—participated in the EoI, only BCG participated in the final tender. BCG will work with the state finance department for six months and has quoted a fee of around Rs 9.5 crore. Some of the proposals are likely to be included in the next budget. BCG has also started working with the finance department to streamline expenditures in tenders across major departments. Moneycontrol contacted BCG for comments but did not receive a response. The article will be updated once we hear from them.

Public discontent over the government's decision

Many criticised the government's decision to appoint a private consultant. MG Devasahayam, a retired IAS officer, told Moneycontrol that most consultants lack in-depth knowledge and produce hollow reports while charging hefty fees. He suggested that experienced IAS officers, many of whom are IIT and IIM graduates, should be roped in instead. Devasahayam warned that freebies and guarantees are unsustainable and harm the state's financial health. "Giving everyone 200 units of free power each month is meaningless. They should optimise resources first," he added.

Also, read: Karnataka govt ropes in Boston Consulting Group to boost revenue amid poll guarantee schemes

Why is the finance department justifying the move?

According to finance department officials, professional consultants bring new ideas and practices. "The job of documenting best practices and advancing reforms by preparing the necessary legal, policy, and procedural frameworks is a lot of work that the overburdened bureaucracy will not have time to handle," they said. "Our plan is to mobilise an additional Rs 5,000 crore per fiscal year for the development of satellite towns around Bengaluru and 10 municipal corporations across the state, with a focus on north Karnataka," said a senior finance department official.

Why is the BJP in Karnataka protesting?

BJP leader R Ashoka said CM Siddaramaiah might even monetise the Vidhana Soudha, the legislative house, to raise resources. His comment follows one of BCG's suggestions to consider monetising around 25,000 acres of land in and around Bengaluru, in its draft report.

Is this the first time BCG is working for the Karnataka government?

BCG is also the knowledge partner for the upcoming global investors' meet, ‘Invest Karnataka Summit,’ scheduled for February 2025. In February 2024, BCG presented the design of the proposed KHIR (Knowledge, Healthcare, Innovation, and Research) City near Bengaluru to the state's Major Industries and Infrastructure Development Minister MB Patil. The BJP government roped in BCG in 2020 to attract investments, extending their contract for one more year in 2021. BCG also served as the knowledge partner for the Global Investors' Meet in 2022.

Also, read: Karnataka to conduct Global Investors Meet in Bengaluru from Feb 12-14 next year

Which are the five guarantees?

The five guarantees are 200 units of free electricity to all households (Gruha Jyothi), Rs 2,000 per month to each female head of the family (Gruha Lakshmi), 10 kg of food grains (rice, ragi, jowar, millet) to Below Poverty Line (BPL) families (Anna Bhagya), Rs 3,000 per month for two years to unemployed graduates, and Rs 1,500 per month for two years to unemployed diploma holders (Yuvanidhi), and free travel for women across the state in state-run non-AC buses (Shakti).

Also, read: In Karnataka, lacklustre Congress performance casts a shadow on guarantee schemes

What is the impact of the guarantees?

While these five guarantees benefit 5.10 crore people in the state, they cost the exchequer Rs 36,000 crore in 2023-24. Siddaramaiah allocated Rs 52,009 crore for these schemes this fiscal year. His revenue-deficit budget for 2024-25 totals Rs 3,71,383 crore, and envisages annual borrowings exceeding Rs 1 lakh crore for the first time.

The Congress was banking on Siddaramaiah, who has presented a record number of budgets and credited for maintaining fiscal discipline, to implement these guarantees. However, the government was not prepared for the severe drought. The severe drought in 2023-24 affected 226 of 236 taluks, prompting the state to seek Rs 18,171 crore from the Centre. When no funds were forthcoming, the state approached the Supreme Court, after which the Centre released Rs 3,454 crore.

What hikes have the government imposed to fund the guarantees?

To generate additional revenue for funding guarantees, the state government increased fuel prices by Rs 3 per litre, raised the guidance value of properties by 15-30 percent, imposed an additional excise duty (AED) of 20 percent on Indian-made liquor (IML) across all slabs, increased AED on beer from 175 percent to 185 percent, introduced a 3 percent additional cess on newly-registered transport vehicles, implemented a lifetime tax on EVs (electric vehicles) priced above Rs 25 lakh, and hiked stamp duty charges by 200 percent to 500 percent for all documents not requiring registration. The state government has also hinted at hikes in property tax, water tax as well as bus fares.

Also, read: Karnataka: Petrol, diesel prices rise by Rs 3 as state government increases sales tax on fuel

Which are the other recent projects of BCG?

Last year, the Union government engaged BCG to help prepare the Vision 2047 document (Viksit Bharat). In 2020, BCG advised the Andhra Pradesh government on decentralised development across all regions, in contrast to McKinsey's involvement under the previous N Chandrababu Naidu-led state government in 2016 to mobilise private and global financing for Amaravati.

In 2017, NITI Aayog announced plans to hire consultancy firms, including BCG, for time-bound projects. Recently, the Goa government enlisted BCG to prepare the vision document 'Viksit Goa @ 2047'. Last year, the Tamil Nadu government selected BCG to "develop an overall strategy and roadmap for Tamil Nadu to realise the vision of a $1-trillion economy".

Also, read: Congress party's poll guarantees: A tightrope walk awaits new Karnataka government