REVENUE-EXPENDITURE MANAGEMENT: A STUDY OF KARNATAKA STATE. Dr S V Hegadal Associate Professor, CSI College of Commerce, Dharwad

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1 REVENUE-EXPENDITURE MANAGEMENT: A STUDY OF KARNATAKA STATE Dr N M Makandar Anjuman Arts, Science, Commerce College & PG Centre, Dharwad, Karnataka Dr S V Hegadal Associate Professor, CSI College of Commerce, Dharwad Mr. I. K. Mulla Project Fellow, UGC MRP, Anjuman Arts, Sci. Commerce College & PG Centre Dharwad ABSTRACT India has chosen a federal structure. Hence the centre state financial relations are based on the principles of federal finance. In the words of R.S.Gal, Broadly speaking the structure of the constitution of India is so unusual and so unique in itself that it is very difficult, if not impossible, to describe it concisely and at the same time precisely. However, it may legitimately be said that our constitution is neither purely federal nor unitary in character. But it is really a mixture of two structures though it leans more in favor of the federal rather than the unitary structure. The present paper is an attempt to evaluate the revenue and expenditure management by the state of katnataka. The economy of Karnataka has undergone a steep transition in last one decade. The state has several strengths that should allow it to accelerate forward and build on this legacy. The State's various initiatives in the primary sector, especially in agriculture and allied activities, have contributed to better redistribution of wealth and inclusive growth. Karnataka's economy is likely to grow at 5.9% in (GSDP at constant prices ) which is slightly less than the all-india average. The decline can be largely attributed to the State's economy being more open to external trade as compared to the National economy. The increasing significance of public expenditure in economic development and the identification of the determinants of public expenditure have become the subject of recent interest among economists. The State's situation with respect to fiscal deficit, public debt, revenue surplus, proportion of capital outlay, per capita development outlay are all very positive. However, the same is to be translated proportionately into overall outcomes of human development indices, regional balance, poverty and the indices of social and gender inclusion. There is an emergent need to rededicate the State's efforts to refocus on these prime priorities of development Keywords: Brands, Acquisitions and mergers, Brand extensions, Globalization, Automobile industry Introduction: The constitution of India provides for division of functional domains and resource raising powers between centre and states as per central list, state list and concurrent list. In this scheme, the states have been entrusted with a crucial role in the growth process and most of the developmental functions have been assigned to them. Both the centre and the state governments exercise their powers to raise revenue and determine the expenditure pattern based on the constitutional classification but it has been observed that the assignment of certain taxation powers to the states, does not give them resources sufficient to meet the responsibilities bestowed upon them.1 As a result, the revenue expenditure of the state governments grows faster than their revenue receipts and the gap between the revenue receipts and revenue expenditure has continued to enlarge. Such a situation has resulted in growing revenue deficit of the state governments. The history of financial relations between the centre and the provinces in India is about a hundred years old. But, as is well known, the Indian states had remained outside the fiscal and financial systems of the rest of the country except for certain arrangements entered into with them by the Government of India regarding such matters as maritime customs, Central excises, posts and telegraphs and railways. India has chosen a federal structure. Hence the centre state financial relations are based on the principles of federal finance. In the words of R.S.Gal, Broadly speaking the structure of the constitution of India is so unusual and so unique in itself that it is very difficult, if not impossible, to describe it concisely and at the same time precisely. However, it may legitimately be said that our constitution is neither purely federal nor unitary in character. But it is really a mixture of two structures though it leans more in favor of the federal rather than the unitary structure. Karnataka is a progressive state of the Indian Union and has a long and proud history of significant achievements. Karnataka is the eighth largest state in terms of geographical area and accounts for around 5% of India s population. Karnataka is largely a rural state with 61% of the population in the rural areas. As per the data revealed by the 2011 census, the population of Karnataka stands at 6.11 crore, an increase from figure of 5.29 crore in the 2001 census.

2 The economy of Karnataka has undergone a steep transition in last one decade. Karnataka s economy has not been immune to the macro-economic environment prevailing at the national level. Karnataka has several strengths that should allow it to accelerate forward and build on this legacy: Strong economic growth2 A well-structured and qualified administrative system Fertile lands and high agricultural productivity along river basins and in irrigated areas Leadership in coffee, raw silk, sandalwood, and floriculture production Reputation as a progressive state Strong position in new high-technology industries such as biotechnology3 Rub-off from success of high technology industry Availability of trained manpower Wide network of educational institutions Generally peaceful environment Need for the Study Karnataka has made notable progress in all sectors during the course of the 11th Plan. As far as overall growth is concerned, the increase in State Income has been satisfactory inspite of the global slowdown in recent years. The increase in State Gross Domestic Product was 7.2% during the 11th Plan. Despite the pressures of adverse national and global macroeconomic conditions, Karnataka has consistently performed well on various fronts. Its economic performance has been led by a strong dominance of the service sector which is likely to grow by 8.9% in The State's various initiatives in the primary sector, especially in agriculture and allied activities, have contributed to better redistribution of wealth and inclusive growth. Karnataka's economy is likely to grow at 5.9% in (GSDP at constant prices ) which is slightly less than the all-india average. The decline can be largely attributed to the State's economy being more open to external trade as compared to the National economy. The increasing significance of public expenditure in economic development and the identification of the determinants of public expenditure have become the subject of recent interest among economists. The present study reviews the literature on causality studies and on public expenditure determination. Public expenditure plays a significant role in the functions of economy at almost all stages of economic development. The government resorts to expenditure and revenue programmes to produce desirable effects on the national income, production and employment. Public expenditure aims at the expansion of the volume and rate of investment in both public and private sectors and the increase in the production of agricultural and industrial sectors. Review of literature Apart from official reviews of state finances available from sources such as the various Finance Commission Reports, annual reviews of the Reserve Bank of India (RBI) and Economic Survey of the centre, this area of research has generated a substantial amount of literature. The trends in state finances placing the problems with state finances in time have been examined by a number of authors, mainly to identify specific elements that contributed to the fiscal imbalance and with a view to recommend measures to tackle the identified factors. Tax structure refers to the aggregate of all taxes. When economic development takes place the tax structure also will undergo changes. When the economy is agrarian, property taxes are the major sources of revenue to the government. When the economy grows as a result of industrialization and commercialization, taxes on commodities and services become the major source of revenue. Adamsmith speaks of tax source as Revenue from the people. He advocated only limited functions of the state, but since then the functions of the state increased much, and the continuous emphasis on social welfare compelled the state to increase the social services considerably. Therefore, he does not serve the purpose of the modern state as he emphasized taxes only as the source of income, (i.e.) income from people. Nowadays taxes are neither the only sources of income, nor income from taxes alone can serve the purpose of the state. Classical Economists considered taxation primarily as a means of raising revenue. For modern economists taxation is not merely a source of revenue. It is an instrument for changing the pattern of consumption, investment and the level of national income. Contemporary writer Bastable speaks of taxation as, taking of the revenues from the society by the power of the Sovereign. Prof. Adam calls it as Derivative Revenue. Prof. Seligman speaks of compulsory revenue with the sub group, taxing power, viz. taxes, special assessment and fees. Prof. Shirras called it as tax revenue. Rao and Singh (1998) in their study The Assignment of Taxes and in India find that the Constitution exhibits a clear centripetal bias in the distribution of fiscal powers. In addition to the functions assigned, the centre can also influence the expenditure decisions of the states. They conclude that the assignment of tax powers follows the principle of separation in contrast to that of concurrence followed in federations like the USA and Canada. Objectives of the Present Study

3 In view of these gaps in determining the states' expenditure the present study has the following objectives 1. To analyze the Trends in revenue and capital receipts 2. To analyze the Trends in developmental and non-developmental expenditure 3. To analyze the formation by the Government of Karnataka to To analyze the and expenditures 5. To analyze the Composition of Revenue 6. To analyze the Plan and Non-plan of Karnataka Methodology, Data Analysis and Interpretation The State's situation with respect to fiscal deficit, public debt, revenue surplus, proportion of capital outlay, per capita development outlay are all very positive. However, the same is to be translated proportionately into overall outcomes of human development indices, regional balance, poverty and the indices of social and gender inclusion. There is an emergent need to rededicate the State's efforts to refocus on these prime priorities of development. The study is based mainly on the secondary data, which were collected from Economic survey of Karnataka and other research papers and published reports. The data so collected was properly analyzed and classified to achieve the objectives set for. The percentage and comparative analysis methods have been used to interpret the data. Following are the parameters identified to evaluate the Fiscal condition of the state 1. Trends in revenue and capital receipts in Karnataka (Rs. Crore) 2. Trends in developmental and non-developmental expenditure in Karnataka(Rs. Crores) 3. formation by the Government of Karnataka to and expenditures of Karnataka 5. Composition of Revenue ( % of GSDP) 6. Indicators in Karnataka (in Percentage) 7. Plan and Non-plan of Karnataka ( Rs crore) Karnataka vis-à-vis Other States The State's major fiscal indicators continue to compare well with the 'all states' average for a number of years. Revenue deficit as a proportion of gross fiscal deficit (GFD) is -10.2% which is lower than all States average (-10%) for all the time points presented and the surplus in the recent years has been larger than the other States during 12. Further, the State has a better capital outlay of 110.2% in the GFD as compared to 102% of all States average in 12. The other important expenditure indicators such as the proportion of interest payments in the revenue expenditure and that of non-development expenditure in the aggregate disbursements also place Karnataka in a better position. On the resources front, while Karnataka has all along performed better than all states average in terms of tax revenue as a proportion to revenue expenditure, that of non-tax revenue does not compare favorably with other States. The State's revenue receipts as a percent of GSDP has increased from 15.97% in to attain its peak level of 16.55% in The global economic meltdown has had a considerable negative impact on the State's tax revenues during and , bringing down the share of revenue receipts to GSDP to 14.07% and 14.26% respectively. However, the State's revenue resources are showing signs of recovery from (15.28%), and are further expected to increase to 15.64% in On the expenditure front, capital outlay as percent of GSDP has increased from 2.81% in to reach its peak level of 4.43%in since then capital outlay as percent to GSDP has declined to 4.07 in 12 and 3.55 in This poses a great challenge and it is a matter of concern for Karnataka due to the infrastructure inadequacies prevailing in the State. In this context, the Reforms Commission (ERC) constituted by the Government of Karnataka has recommended that capital outlay needs to be insulated from revenue adversities. There is a marginal increase in the share of central taxes. Share of grants from the central Government has increased 1.29 % of GSDP to 2.56% of GSDP during the reference period. Non-tax revenue has revealed a decline and warrants attention. State Income Advance estimates show that Karnataka's Gross State Domestic Product (GSDP) at constant ( ) prices is expected to grow at 5.9% and reach Rs crore in The agriculture and allied sector is expected to grow by 1.8% in as against a negative growth of 2.2 % during 12. The industry sector (comprising mining & quarrying, manufacturing, construction and electricity, gas & water supply) is estimated to stay at same level of 12 at 2.4% due to negative growth of 49.9% in mining and quarrying sector. A slight decrease in the growth rate of the service sector from 9.5% in 12 to 8.9% in (Real Estate, Ownership of Dwellings and Business Services, Public Administration and Other Services, which have each grown by more than 10%) is a key driver of the 5.9% growth of GSDP in , i.e. from Rs crore in 12 to Rs crore in

4 Per capita Income Per Capita State Income (i.e. per capita NSDP) of Karnataka at current prices is estimated at Rs during as against Rs in 12 with an increase of 13.0%. The level of per capita income at constant ( ) prices for the year is estimated at Rs as compared to Rs achieved in 12. Per capita GSDP at current prices is expected to reach Rs in from Rs in 12 indicating an increase of 12.7%. At the same time, per capita GSDP at constant prices is expected to increase from Rs in 12 to Rs in i.e. an increase of about 4.9%. Liabilities The total liabilities of the State Government increased from Rs crore in to Rs crore in BE at a CAGR of %. The total liabilities are however, within the limit of 25% prescribed by the 13th Finance Commission. Year State's Own Tax Revenues Table-1 Trends in revenue and capital receipts in Karnataka (Rs. Crore) Share in Total Total Total Central Tax Non- Revenue Taxes Tax Total Aggregate Year (RE) (RE) RE=Revised Estimates, BE=Budget Estimates Source: economic Survey of Karnataka Table-2 Trends in developmental and non-developmental expenditure in Karnataka (Rs. Crores) Non- Developmental Developmen Non- Developmental as tal Developmental as % of Total % of Total Aggregate (RE) (RE)

5 RE=Revised Estimates, BE=Budget Estimates Source: economic Survey of Karnataka Year Table-3 formation by the Government of Karnataka to Value of Assets Created by Departmental Changes in Total Commercial Stock Government Administration Gross Formation Undertakings (RE) (RE) Source: economic Survey of Karnataka Disbursem ent Outlay(net) % to GSDP Revenue Revenue Expenditur e Disbursem ent Outlay(net) Item/Year Revenue Revenue Expenditur 85 e Table-4 and expenditures of Karnataka Table-5 Composition of Revenue (% of GSDP)

6 Year State Taxes Share of Central taxes Grants from Centre Non-Tax Revenue Total Table-6 Indicators in Karnataka (in Percentage) Particulars RE 12BE Revenue Revenue Development Social Services Economic Services General Services Interest payments Wage Bill Pensions Total Consolidated Debt Total Consolidated Fund Table-7 Plan and Non-plan of Karnataka (Rs Crore) Item (A/C) (RE) 12(BE) I Plan 1 State Plan (94.80) (94.47) (93.14) 2 Centrally Sponsored( including central sector) (5.20) (5.53) (6.86) Total Plan Outlay II Non-Plan Of which Irrigation Projects Pending Approval (Non-Plan) Conclusion Change is a continuous process. Change is inevitable for progress and reforms. Therefore attempts are to be made to give a new dimension to the administrative machinery to adopt a new path. As the expenditure pressure mounted, the States, instead of taking steps to mobilize resources through tax and nontax reform and to cut down unnecessary expenditure, resorted to borrowings. reforms should be targeted towards reducing the expenditure pressure on account of salary, pension and interest payments. Efforts must be made not only to improve investments in secondary and tertiary sector but efforts must be made for dispersal of opportunities through directed investments. Interest payment was major expenditure pressure. Karnataka's robust economic performance has been supported by the effective management of the State's fiscal situation. The State has enhanced its revenue receipts through rationalization of its tax systems and deployment of mechanisms to check leakages. The State's tax effort and public expenditure to GSDP ratio is one of the highest in the country thereby allowing limited tax elasticity. This challenge needs to be tackled sooner than later to avoid further complications. There is a need to build an early consensus around the issue. Karnataka is one of the few major States to have consistently raised higher resources than were projected in

7 the Five Year Plans. The per capita plan outlay of Karnataka at Rs. 6,231 in 12 is the highest among major States. Efficiency in tax collection has boosted Karnataka s revenue. References KARNATAKA Finance Dept R.S. Gal: Administrative relations between the union and the states, Jain, Kashyap and Sriniwasan (ed) The Union and the States, P.297. Government of India: Report of the Finance Commission, 1952, P.18. Fabricant S., The Trend of Government Activit in the U. S. ~inck ~ ~ a ~ ~ u r e oaf ue conomic 'Research Inc., New York, 1952, pp Ernest Kurnow, "Determinants of State and Local, Reexamined", National,Jou_J_~1, Vol.XV1, pp Martin, A. and Arthur Lewis, A.W., "Pattern of Public Revenue and ", The Manchester School of Economic and Social Studies, Vol.XXIV, 1956, p.102. Daniel Landau, "Government and Economic Growth - A Cross Country Study" Southern Economic Journal, Vol. 49, J.a29nj p983 Vinod Kumar Singh, Government and Economic Development, Criterion Publication, New Delhi, 1986 Madalgi, S.S., "State Government Exfinditure, to ", RBI Bulletin, Economic survey of Karnataka, All the years.