Karnataka urges Centre to address state's 'shrinking fiscal space' in Union Budget

Ahead of the upcoming Union Budget, the Karnataka Government on Saturday, January 10, urged the Centre to address the state's "shrinking fiscal space", adding that it is under mounting pressure due to GST changes, rising social commitments and rapid urbanisation.

Karnataka Revenue Minister Krishna Byre Gowda, on behalf of the state government, handed over a representation to Union Finance Minister Nirmala Sitharaman at the Union Pre-Budget Meeting for 2026-27 in Delhi today.

In a release issued by the Chief Minister's Office, Gowda said, "Karnataka is a major contributor to national growth, but is facing shrinking fiscal space amid GST changes, rising social commitments, climate shocks, and rapid urbanisation. States' responsibilities have expanded faster than their revenues, necessitating corrective fiscal measures in Budget 2026-27."

The minister also flagged the fiscal and employment impact of replacing the demand-driven Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) with the allocation-based Viksit Bharat Guarantee for Rozgar and Ajivika Mission (Gramin) (VB-G RAM G) scheme.

He said the shift had reduced effective employment days and cautioned that to continue providing livelihood security to the tune of 13 crore person-days, "Karnataka would require approximately Rs 2,000 crore, which is fiscally unsustainable."

The minister sought reconsideration of the scheme design, restoration of demand-driven employment and adequate uncapped central funding.

Gowda stressed that while Karnataka is a major contributor to national growth, it is increasingly constrained fiscally.

He said the state wished to place certain new issues, along with a reiteration of earlier matters, for consideration in the Union Budget 2026-27.

On GST rate rationalisation, the minister highlighted a significant erosion of the state revenues.

Gowda noted that post-rationalisation, Karnataka's GST growth had declined from 12 per cent to five per cent, resulting in a Rs 5,000 crore shortfall this year and Rs 9,000 crore annually.

While the Centre had offset its losses through cess on pan masala and excise on tobacco, he pointed out that states lacked similar flexibility and requested "a robust revenue protection mechanism for states and to ensure full compensation for revenue loss, similar to GST Compensation Cess."

The minister called for sharing of excise duty on tobacco and cess on pan masala. Observing that states bear the public health, enforcement, and regulatory costs, he said it was inequitable that cess proceeds remain outside the divisible pool and sought 50:50 sharing of excise duty on tobacco and cess on pan masala to restore fiscal equity and cooperative federalism.

Gowda also flagged delays in Central releases under the Jal Jeevan Mission (JJM).

Against a Central release of Rs 11,786 crore, Karnataka had released Rs 24,598 crore, including Rs 13,004 crore in advance over and above its share to avoid disruption of JJM works, he said.

Gowda requested urgent release of pending Central share, including reimbursement of advances, to ease fiscal stress and ensure timely completion.

In agriculture, the minister noted that the MSP procurement was inadequate for crops affected by gluts and perishability.

Karnataka has proposed a Price Deficiency Payment Scheme (PDPS) for eight crops--maize, soybean, mango, chilli, onion, tomato, turmeric and ginger, and requested an "additional allocation of Rs 796 crore under PM-AASHA" for timely rollout in 2026-27.

The minister further sought enhanced Central support for frontline workers, stating that contributions to Anganwadi workers, ASHAs and cooks/helpers had remained stagnant.

He requested revision of the Central share to Rs 8,000 per month for Anganwadi and ASHA workers and Rs 5,000 per month for cooks and helpers, along with expansion of National Social Assistance Programme coverage to 50 per cent total beneficiaries and upward revision of pension amounts.

On infrastructure and regional development, Gowda reiterated the demand to declare the Upper Bhadra Project a National Project and to release Rs 5,300 crore Central assistance as announced 2023-24 Union Budget.

He also sought expeditious release of pending 15th Finance Commission grants and disaster relief, citing Special Grants of Rs 5,495 crore, State-Specific Grants of Rs 6,000 crore and a 15th FC grants shortfall Rs 4,044 crore.

Emphasising regional equity, he said Kalyana Karnataka requires "additional Central support beyond state's Rs 5,000 crore annual allocation to bridge Human Development Index (HDI) gaps".

The minister reiterated Karnataka's "commitment to fiscal discipline and national growth" and appealed for Budget 2026-27 to restore fiscal balance, predictability, and trust between Centre and states.

With PTI inputs