COVID-19 further dents Karnataka’s fragile finances

In March, when Chief Minister B.S. Yediyurappa presented his seventh budget and the first in the current innings, he candidly admitted to the poor condition of Karnataka’s finances. The State was staring at a huge reduction of about ₹20,000 crore from its share in Central transfers, inclusive of GST compensation and as a consequence of implementation of the 15th Finance Commission’s recommendations, while revenue expenditure had ballooned.

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Now, the unprecedented economic shutdown to contain the COVID-19 pandemic has left the State’s finances literally in shambles, making the ₹2.37 lakh crore budget for 2020-21 a non-starter. Some of the government’s key tasks, like helping rebuild livelihoods in the 13 districts where losses due to floods and rains last September are estimated to be about ₹35,000 crore, have been overtaken by the present crisis.

No pay cut yet

For now, the government has decided not to cut salaries of its employees for the month of April, and has directed departments to ensure that there is no default on repayments. But it has asked departments not to incur any other expenditure or implement any budgetary proposals. On an average, the monthly wage and pension bill is about ₹5,000 crore while the annual interest repayment is about ₹22,216 crore. The State’s annual committed expenditure that comprises salaries, pensions and interest stands at ₹81,000 crore, with a ₹10,000 crore increase in the wage bill having been added only this financial year.

 

Meanwhile, while the Centre is yet to release ₹8,000 crore of GST compensation for the December-March period, the State’s own tax collections, which contribute 62% of the revenue, have taken a severe hit exacerbating the already fragile financial situation.

Weak collections

An indication as to what can be expected for April has come through the GST collections for March. Officials, speaking on the condition of anonymity, indicated that collections for March were about 20% of the normal, and this in a month when the lockdown’s impact had been only for about a week.

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“We have collected about ₹1,500 crore and the last date for payment has also been extended up to June,” said a Finance department official. “April’s collection will be far less as there was no economic activity,” the official added. On an average, about ₹7,000 crore of GST is collected every month.

The exchequer has also lost about ₹1,200 crore on Karnataka Sales Tax collection on petroleum products over the last 35 days. The bigger loss has come in excise duty collection as the losses have been pegged at about ₹65 crore to ₹70 crore a day. Since March 24, when all liquor vending outlets were ordered shut, the loss is estimated to be about ₹2,400 crore to ₹2,500 crore.

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Similarly, the Stamps and Registration Department, which was shut for more than a month, is estimated to have lost out on revenue to a tune of about ₹1,000 crore. Though most of the property registrations had been deferred, officials opined that given the extent of insecurity over jobs and business prospects, these deferred registrations were likely to not happen at all. The collection of transport tax/fee, which is estimated to be about ₹16 crore – ₹17 crore a day, has been lost for about a month.

 

A desperate State government has announced that it would raise about ₹15,000 crore by monetising real estate, including auctioning 12,000 sites and through the regularisation of illegal constructions by levying a penalty.

On Wednesday, the government announced excise duty on IML (Indian Made Liquor) would be increased to range between 17% and 25%. The latest duty increase is expected to net ₹2,350 crore in this financial year. Separately, the government cancelled leave encashment for government staff for 2020, and said it would withhold dearness allowance payable in July and January 2021.