High‑performing state, deepening fiscal stress

Karnataka, which was once celebrated for its fiscal discipline, may be on the brink of a financial crisis, as it finds itself constrained on every front. The warning signs are no longer subtle; they are structural: revenue shortfalls, shrinking devolution, rising borrowings, and mounting welfare commitments. Chief Minister Nirmala Siddaramaiah has stated that the rationalisation of Goods and Services Tax (GST) alone has dealt a revenue blow of Rs 18,500 crore this year. This comes on top of a revenue deficit of Rs 19,000 crore estimated in the Budget, meaning that even if all targets are met, the state could end the year staring at a shortfall of at least Rs 37,500 crore.

The pressure is intensified by the five flagship guarantee schemes that collectively cost Rs 51,034 crore. Against a total budget size of roughly Rs 4 lakh-crore, this is a significant burden. The state is now perilously close to breaching the Karnataka Fiscal Responsibility Act (KFRA) thresholds. The current fiscal deficit is projected at 2.95% of Gross State Domestic Product (GSDP), just a shade under the 3% ceiling. Total liabilities stand at 24.91%, again brushing against the 25% limit. Revenue deficit is 0.63% of GSDP, violating the KFRA mandate of maintaining a revenue surplus. Any additional borrowing could push Karnataka into a statutory default — an unthinkable situation for a state long seen as a model of financial responsibility.

A significant share of Karnataka’s distress comes from what it claims to be stepmotherly treatment from the Centre. The State argues that it suffered a loss of Rs 80,000 crore under the Fifteenth Finance Commission. For every rupee it contributes in direct taxes, the state gets back only 15 paise in return. There is no compensation for GST losses, while cess and surcharge collected by the Centre are kept outside the divisible pool. It is a paradox that one of India’s top performers in GDP, per capita income, investment, innovation, and most other economic indicators finds itself in financial distress. The solutions require both federal reforms and internal tightening. The Centre must ensure fairer devolution, include cess in the divisible pool, and release pending grants such as for Upper Bhadra and Bengaluru infrastructure. The State, in turn, must boost non-tax revenue, rationalise expenditure, and trim non-essential schemes, without compromising capital investment, which is crucial for long-term growth. In the end, Karnataka must confront an uncomfortable truth: growth alone will not shield it from fiscal fragility. Karnataka can remain a high-growth engine only if it balances populist schemes with financial prudence, and strengthens its revenue productivity, while securing a fairer share of the national tax pool.