Karnataka’s Fiscal Transparency Model Praised by World Bank

World Bank assessment on state finances

Karnataka’s Fiscal Transparency Model Praised by World Bank: The World Bank has highlighted Karnataka’s fiscal reform as a model practice for other Indian states.
This observation was made in a report submitted to the 16th Finance Commission. The report emphasised the importance of transparency in assessing the true fiscal position of state governments.

The World Bank noted that Karnataka’s approach helps in revealing hidden liabilities. It strengthens budgetary discipline by preventing debt from being pushed outside official accounts.

Karnataka’s 2014 fiscal reform

In February 2014, Karnataka amended its Fiscal Responsibility Legislation Act. The amendment expanded the definition of state liabilities to include borrowings by public sector undertakings (PSUs) and special purpose vehicles (SPVs).

Earlier, loans taken by these entities remained outside the state budget. After the reform, such borrowings were treated as part of the state government’s total debt.

Static GK fact: Karnataka became one of the earliest Indian states to legally recognise PSU and SPV debt as sovereign liability.

This step provided a clearer picture of the state’s financial health. It also reduced the scope for creative accounting through off-budget routes.

Problem of off-budget borrowing in states

Off-budget borrowing has emerged as a major fiscal risk for Indian states. States often use PSUs and SPVs to finance subsidies, infrastructure projects, and loss-making utilities.

These borrowings do not appear in budget documents. As a result, the actual debt burden remains hidden from legislatures and the public.

The World Bank observed that off-budget borrowing has become a quasi-permanent financing tool. This practice weakens fiscal discipline and increases long-term debt sustainability risks.

Union government versus states

The report highlighted uneven progress between the Union government and the states. By FY2022, the Union government brought nearly 93% of its off-budget liabilities, worth about ₹3.7 trillion, onto its balance sheet.

Similar consolidation has not occurred at the state level. Most states continue to report liabilities in a fragmented and inconsistent manner.

This contrast makes Karnataka’s reform stand out as a replicable example. The World Bank described it as a benchmark for improving subnational fiscal transparency.

Data gaps and underreporting concerns

The World Bank analysed fiscal data from 12 Indian states. It found significant discrepancies in off-budget borrowing disclosures.

States such as Tamil Nadu and West Bengal underreported their liabilities. These figures were far lower than estimates provided by the Comptroller and Auditor General of India.

For instance, Tamil Nadu reported off-budget borrowing of ₹594 crore for 2021–22. The CAG estimate for the same year was ₹12,357 crore.

Such gaps raise concerns about the credibility of fiscal reporting. They also limit informed policy decisions by finance commissions.

World Bank recommendations for states

The World Bank recommended a consolidated Public Sector Accounting System. This system would capture all liabilities of state-owned entities.

It also suggested a standardised reporting framework for off-budget borrowing. Enforcement should be done by the CAG under Article 150 of the Constitution.

States should disclose guarantees, loans, grants, and revenues kept outside the Consolidated Fund. Revenue forgone through waivers must also be transparently reported.

Static GK Tip: Article 150 empowers the CAG to prescribe accounting formats for Union and states.

Static Usthadian Current Affairs Table

Karnataka’s Fiscal Transparency Model Praised by World Bank: