Karnataka's Changing Fiscal Landscape

Analysing the second Karnataka budget since the Fourteenth Finance Commission award, it is noted that, as assured, more fiscal space is made available to the state government. With greater untied funds, the state has budgeted for higher capital expenditure in some key areas--urban development, police, and tribal welfare--even as it failed to build capacity for power generation, and has introduced too many schemes with too little funds allocated to each.

The authors are grateful to M Govinda Rao for his advice and comments.

The Report of the Fourteenth Finance Commission (FFC) recommended an increase in tax devolution from the centre to the states from 32% to 42% of the divisible pool of taxes. This has brought a sea change in the fiscal relationship between the union and the states.

The commission had argued for the increase on the grounds that the union government was steadily intruding into state and concurrent subjects, and that it would be better for state governments to take expenditure decisions on the subjects entrusted to them in the Constitution. Although the commission did not argue for an overall increase in transfers and did also leave fiscal space for centrally-sponsored schemes (CSS) to continue, its recommendations to increase the tax devolution by 10 percentage points were intended to enhance the fiscal autonomy of states. It also recommended the rationalisation of CSS by confining them to those schemes which are meritorious with nationwide externalities to be designed and implemented, with representations from the union, state and domain experts.