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The article delves into the increasingly dire economic situation in Karnataka, particularly as it relates to the impact of Congress's ambitious welfare schemes, known as 'freebies,' on the state's finances. While these programs were initially championed as a cornerstone of the administration's social agenda, concerns are mounting about their sustainability given the state's slowing economic growth and rising fiscal deficit.
Karnataka's real GDP, which had consistently outpaced the national average since 2019-20, is projected to lag behind in 2023-24, with a growth rate of 6.6 percent compared to the national estimate of 7.3 percent. This slowdown in economic activity threatens to exacerbate the financial strain on the state. As businesses earn less and unemployment potentially rises, tax revenue collection decreases, limiting the government's ability to fund welfare schemes.
Adding to the financial burden, Karnataka is facing a growing fiscal deficit, which has risen from 2.14 percent of GDP in 2022-23 to 2.67 percent in 2023-24, and is estimated to reach 2.95 percent by 2024-25. This indicates that the state is spending more than it earns, putting pressure on its budget.
Further compounding the problem, both tax collections and grants from the central government have been declining in Karnataka. State tax revenue decreased from 7.54 percent of GDP in 2021-22 to 6.24 percent in 2023-24, while central grants fell from 1.22 percent to 0.55 percent during the same period. This decline in revenue sources significantly impacts the state's ability to fund its programs.
Another critical concern is the steady rise in Karnataka's liabilities, which are projected to increase from 22.6 percent of GDP in 2023-24 to 23.77 percent in 2025-26 and 23.97 percent in 2027-28. This escalating debt burden limits budget flexibility for welfare programs, as a larger portion of revenue is allocated to debt servicing.
Adding to the financial woes, Karnataka's Foreign Direct Investment (FDI) inflows have been steadily declining, falling from $22 billion in 2021-22 to $10.4 billion in 2022-23, and further reducing to $6.57 billion in 2023-24. This decline in FDI is particularly concerning because it can stifle economic growth, reduce job creation, and lower tax revenue, making it even more challenging for the state to sustain or expand freebie schemes.
The article concludes by highlighting the precarious financial position of Karnataka, with its slowing economic growth, rising fiscal deficit, declining revenue sources, and increasing liabilities. The state's ambitious welfare programs, while initially intended to benefit its citizens, now pose a significant challenge to its financial stability. The article suggests that Karnataka may need to reconsider its freebie schemes and prioritize essential services to avoid further financial strain.
Source: Is Congress's freebie promises in Karnataka weighing heavily on state finances?