Stop revenue-deficit grants, Karnataka tells 16th Finance Commission

Bengaluru: Karnataka has asked the 16th Finance Commission to abolish “revenue deficit grants” (RDG) by pointing out that several states, including Congress-ruled Himachal Pradesh, have done little to earn more than they spend even after getting monetary aid to cover the
shortfall.

The Siddaramaiah administration has made this argument in its additional memorandum to the 16th Finance Commission, headed by economist Arvind Panagariya, which will cover a five-year period starting April 1, 2026 and decide how taxes will be divided among states. 

RDGs are given to help states meet essential spending needs by bridging the gap between revenue receipts and revenue expenditure. The 15th Finance Commission had allocated Rs 2.94 lakh crore as RDGs to 17 states for the 2021-26 period. 

Karnataka specifically cited examples of Andhra Pradesh, Himachal Pradesh, Kerala and West Bengal. “...despite receiving sustained financial support, these states have not demonstrated meaningful progress in narrowing their revenue deficits. On the contrary, the deficits have increased year after year,” the government said. 

“The continuous award of RDGs has not contributed to a reduction in revenue deficits for the recipients of these grants. Instead, they have channeled substantial fiscal resources toward states with deep-rooted structural inefficiencies, thereby creating a significant moral hazard—offering financial support without ensuring corresponding fiscal reforms,” the government argued.

Karnataka also underlined the “futility” of revenue projections the 15th Finance Commission made for states. In 2025-26, Karnataka was projected to have a revenue surplus of Rs 56,625 crore. Actually, the state is under a revenue deficit of Rs 19,262 crore. 

The state government said the 15th Finance Commission did not take into account “exogenous shocks” (such as Covid-19), “expenditure mandates (pay commissions, welfare payments etc) and “revenue-side uncertainties” (GST volatility). 

“As a result of inaccurate projections, the RDGs fall short of achieving their intended objectives. In this context, the state submits that the practice of normative assessment for deficit estimation be discontinued altogether, as it undermines the effectiveness of the grant allocation mechanism,” the government said. 

Karnataka’s share in the divisible tax pool dropped from 4.71% to 3.64% under the 15th Finance Commission, which the government said caused a loss of Rs 79,770 crore. Karnataka lost heavily on the ‘income distance’ criterion, which is the per-capita GSDP of a state compared with that of a state with the highest per-capita GSDP.

The state wants weightage for “income distance” cut to 25% from 45%. 

In its main memorandum, Karnataka said it wants to retain 60% of what it contributes to the divisible tax pool.