The government of Karnataka is everyday approving new bills. Recently, the government announced an amendment to the Karnataka Fiscal Responsibilities Act (KFRA) for the 2020-21 fiscal to raise the fiscal deficit limit to 5%, amidst a heated debate where opposition leaders strolled out of the Assembly. The Bill was introduced in the Assembly on Thursday by Law and Parliamentary Affairs Minister JC Madhuswamy. In essence, the fiscal deficit is the difference between the government’s income and expenditure.
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In addition, the amendment passed also says that the debt ceiling can be raised as and when required if an extraordinary situation occurs. JC Madhuswamy had said that the pandemic and its fallout regarding the state's financial situation were "extraordinary circumstances". The fiscal deficit was kept below 3% to ensure that the state’s financial health remains intact. When the government acquires more than it can afford to pay back, the opposition says that it will be hard to recover financially.
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Financing based on budget estimates rather than actual figures could be damaging to the state as the state has had negative growth. It could result in the government borrowing more than it could afford to. Raising the limit to 5% goes against the recommendations of the Medium Term Fiscal Plan recommended by the 11th Finance Commission. The commission's recommendations, which were enacted in September 2002, says the fiscal deficit cannot exceed 3% of the Gross State Domestic Product (GSDP). The 11th Finance Commission proposed keeping the fiscal deficit lower than 3% in order to maintain the financial health of the state and to also enhance the scope of developmental activities.
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