The state’s total liabilities, in absolute terms, are expected to rise from ₹6,85,101 crore in 2024–25 to ₹7,64,655 crore in 2025–26.
Published Dec 26, 2025 | 11:22 AM ⚊ Updated Dec 26, 2025 | 11:22 AM
Karnataka Chief Minister Siddaramaiah presents the 2023-24 budget.
Synopsis: Falling revenues post GST rate rationalisation and the cost of the Congress government’s welfare schemes have put Karnataka’s finances under increasingly strain, a mid-year review, tabled in the assembly shows. It predicts lower revenue collections compared with the estimated targets, potentially increasing the revenue deficit in the current financial year.
In a few months, Karnataka Chief Minister Siddaramaiah will present the 2026–27 State Budget, the 17th of his long political career and a historic milestone. But unlike his previous outlays, this one may well be the toughest.
His government is grappling with twin pressures on the state’s finances: the cost of its ambitious flagship “five guarantees” and other welfare schemes, and a drain on revenues due to the Union government’s GST rate rationalisation.
“The increase in committed expenditure, including the state’s spending on guarantees and various welfare schemes, has raised revenue expenditure. Simultaneously, the shortfall in revenue receipts on account of GST rate rationalisation has further constrained the state’s fiscal position,” the Mid-Year Review on State Finances 2025–26, tabled during the Legislative Assembly session in Belagavi on 19 December, stated.
The report predicts that these factors are expected to lower revenue collections compared with the estimated targets, potentially increasing the revenue deficit in the current financial year.
The Mid-Term Fiscal Plan had estimated a revenue deficit of ₹19,262 crore for the year, with revenue receipts projected at ₹2,92,477 crore against revenue expenditure of ₹3,11,739 crore.
In a grim observation, the review also noted that the state’s total liabilities, in absolute terms, are expected to rise from ₹6,85,101 crore in 2024–25 (Revised Estimates) to ₹7,64,655 crore in 2025–26 (Budget Estimates).
The Union government rolled out GST rate rationalisation in September 2025, revising rates for most goods and services into fewer streamlined slabs of five percent and 18 percent, from the previous four-tier structure.
While Karnataka had supported the move in principle, it had flagged concerns over the potential hit to state finances. Those apprehensions were well founded.
On 5 December, Siddaramaiah wrote to Prime Minister Narendra Modi, confirming that gross GST collections for November 2025–26 had seen a two percent decline, compared with a robust 9.3 percent growth in November 2024.
“For the period from September to November 2025–26, for the three months affected by rationalisation, the year-on-year growth in gross GST collections has slowed to 3.3 percent, as against nine percent in the corresponding period of the previous year,” the Chief Minister stated in the letter.
Additionally, the state recorded a 3.1 percent growth in net GST collections between September and November 2025–26. Based on current trends, the state foresees a revenue shortfall of ₹5,000 crore this year.
For the entire financial year, this translates into a shortfall of ₹9,000 crore, Siddaramaiah further noted.
Explaining how the move has affected the state, the Mid-Year Review report notes that states rely heavily on GST as their primary source of revenue, unlike the Centre, which has access to multiple revenue sources such as direct taxes, dividends from public institutions, cesses and surcharges.
“Most of their [states’] expenditure on welfare, administration, and infrastructure is fixed or semi-fixed, and cannot be easily scaled down in response to a revenue shortfall. Therefore, any reduction in SGST or other own-tax revenue for states directly reduces fiscal capacity, potentially forcing them to either borrow more or cut essential services,” the report notes.
It also flagged a decrease in tax devolution and grant-in-aid from the Central government to the state. For the financial year 2025–26, the state had budgeted ₹51,877 crore as tax devolution and ₹16,000 crore as grant-in-aid.
Up to September 2025, the state had received ₹23,040 crore as tax devolution and ₹5,139 crore as grant-in-aid. Grant-in-aid has decreased by 38.2 percent in 2025–26, compared with ₹8,309 crore received during the first half of 2024–25, the report noted.
For FY2023–24, the Congress government in Karnataka spent ₹36,497.96 crore to implement its five pre-poll guarantees, a detailed report from the Comptroller and Auditor General presented in the Assembly in August showed.
The schemes were Gruha Lakshmi (₹16,964.40 crore), Gruha Jyothi (₹8,900 crore), Anna Bhagya (₹7,344.68 crore), Shakti (₹3,200 crore) and Yuva Nidhi (₹88.88 crore).
The state borrowed ₹63,000 crore to fund the schemes and the deficits arising from them, which was ₹37,000 crore more than the previous year’s net borrowings, according to the report.
It warned that this would not only increase the repayment burden in the near future but would also significantly raise the state’s interest burden.
Additionally, while the state’s revenue grew by 1.86 percent over the previous year, there was a mismatch between receipts and expenditure during the current year.
This resulted in the state recording a revenue deficit of ₹9,271 crore after its recovery in 2022–23 from the Covid-induced economic slowdown, the report said.
Even prior to the GST rate rationalisation, the state government had constituted a committee, headed by retired IAS officer KP Krishnan, in August 2024 to examine how the state could mobilise additional resources to meet its growing expenditure needs.
The report, submitted last month, recommended monetising urban land assets, broadening the tax base and introducing auction-based digital excise licensing, among other measures.
Accordingly, for the first time since the Excise Department was set up in the state in 1965, the government will begin auctioning unused retail liquor licences from January 2026.
The move, which was also proposed as part of a resource mobilisation plan in February, is expected to fetch about ₹1,000 crore through e-auctions.
Earlier, in 2024, the government had allowed shops, bars and licensed establishments within the limits of the erstwhile Bruhat Bengaluru Mahanagara Palike to remain open until 1 am.
Following a Supreme Court verdict in August 2024 upholding the rights of states to collect mineral taxes on mineral-bearing land, the Karnataka government, in December 2024, enacted the Karnataka Mineral Rights and Mineral Bearing Lands Tax (MRT) Bill, 2024, to levy a tax on mineral-bearing lands in addition to royalty.
For FY2025–26, tax revenue of ₹3,000 crore is estimated from mines, the review report stated. However, the MRT Bill is still pending presidential assent.
The Union government’s recently passed Viksit Bharat Guarantee for Rozgar and Ajeevika Mission (Gramin) Bill, 2025, is expected to dent the state’s finances further.
Until now, spending under the Mahatma Gandhi National Rural Employment Guarantee Act followed a 90:10 Centre-state sharing pattern, with the Centre fully funding labour expenses, part of the administrative expenses and meeting 75 percent of material costs, while states bore the remaining costs.
The proposed Bill changes this arrangement, shifting to a 60:40 cost-sharing formula, under which states will have to bear 40 percent of all costs.
(Edited by Dese Gowda)
