Karnataka Fiscal Responsibility Act 2002 Explained – Free PDF Download

The News

• Recently, the BJP government in Karnataka took a decision to amend the Karnataka Fiscal Responsibility Act, 2002 in order to allow the state to breach the annual fiscal deficit ceiling of three per cent of gross state domestic produce (GSDP) and increase it to 5% per cent to enable higher borrowings.
• The objective is to tide over the financial crisis created by falling revenues and lack of GST compensation before and after the Covid-19 crisis.
• The monsoon session of Karnataka assembly has begun on Sept 21 2020.

The News

• Even before the current decision, during the Karnataka Budget 2020-21, the government highlighted that Karnataka is facing economic difficulties of a magnitude never faced in previous years.
  • Revenue loss of Rs.35,160 crore due to floods
  • Slump in the state GSDP from 7.8 per cent in 2018-19 to 6.8 per cent in 2019-20
  • Reduction of Rs.8,887 crore in the state’s share of central taxes
  • GST compensation loss of Rs 3,000 crore due to reduced collections
• Under such circumstances, adhering to Karnataka Fiscal Responsibility Act limits has become very tough & the state has decided to amend the limit temporarily.

What is the Karnataka FRA 2002?

What changes?

• The BJP government in Karnataka intends to temporarily amend Sec(4) of the KFRA which has limits on Fiscal deficit.
• The limit for fiscal deficit target is being increased by two per cent for fiscal year 2020-21.
• Now, the state shall ensure that Fiscal deficit of Karnataka be limited to 5% of GSDP to tide over the financial crisis caused by Covid 19 and shortfalls in GST compensation to the state from the Centre.

What impact will it have?

• The 2% increase in the fiscal deficit ceiling will allow the state to borrow a maximum of an additional Rs 36,000 crore in the current fiscal.
• 18000 cr – total GST compensation (11000cr is borrowing from Centre).
• Another 18000 cr, borrowing from centre linked to carrying out reforms as suggested by the Government of India within timelines given as per a government order of May 17, 2020.

• Will Centre also amend its FRBMA targets?

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