Karnataka's Fiscal Windfall: State Secures Rs 11,173 Crore Boost in Tax Devolution for 2026-27
In a significant fiscal development, Karnataka is poised to receive an additional Rs 11,173 crore in tax devolution for the financial year 2026-27, compared to the current fiscal period. This increase follows the 16th Finance Commission's decision to elevate the state's share in the divisible pool to 4.1%, up from the 3.6% recommended by the previous panel. The state's total allocation will rise to Rs 63,049 crore for the fiscal year beginning April 1, marking a substantial jump from the current Rs 51,876 crore.
Commission's Report and Government Acceptance
The 16th Finance Commission, chaired by economist Arvind Panagariya, submitted its report to the Union government on November 17 last year. Finance Minister Nirmala Sitharaman tabled the report in the Lok Sabha on Sunday, with the Centre fully accepting the commission's recommendations. Sitharaman emphasized the government's commitment to fiscal federalism, stating, "The government has accepted the recommendation of the Commission to retain the vertical share of devolution at 41%. As recommended by the Commission, I have provided Rs 1.4 lakh crore to states for the FY 2026-27 as finance commission grants. These include rural and urban local body and disaster management grants."
Congress Government's Disappointment and Demands
Despite the increase, the governing Congress party in Karnataka has expressed profound disappointment. The state government had vigorously advocated for a minimum 5% share in the divisible pool, arguing that the reduction to 3.6% by the 15th Finance Commission resulted in a loss of nearly Rs 80,000 crore. Karnataka's demands included a share proportionate to its contribution to the gross domestic product (GDP), an increase in the cumulative share of states to 50% from the existing 41%, and a portion of cess and surcharges. However, the 16th Finance Commission retained the vertical share at 41%, ignoring these appeals.
Chief Minister Siddaramaiah criticized the decision, likening it to receiving a "chombu" (empty vessel). He stated, "We had made a strong case before the 16th Finance Commission, but the state has been given a raw deal. In contrast, NDA-governed states including Uttar Pradesh (17.6%), Bihar (9.9%), Gujarat (3.7%), Maharashtra (6.4%), and Andhra Pradesh (4.2%) have been favoured. As for the Union Budget, it is the most disappointing and lacks far-sightedness."
Economic Implications and Unmet Project Demands
Basavaraj Rayareddi, economic adviser to the Chief Minister, highlighted that Karnataka would have garnered an additional Rs 25,000 crore had its share been increased to 5%. Siddaramaiah further lamented the absence of central funding for critical irrigation projects, such as Upper Krishna Phase III and Upper Bhadra, in the Union Budget. He noted, "We even sought national project status for UKP-III and had urged the Centre to pay Rs 5,300 crore for the Upper Bhadra project, which Sitharaman had announced in the 2023-24 budget. The Centre has also failed to clear the Mekedatu and Mahadayi projects despite repeated reminders."
Additionally, while the state government allocated Rs 5,000 crore to the Kalyana Karnataka Regional Development Board, it sought a matching grant from the Centre, which went unaddressed. On infrastructure, Siddaramaiah pointed out that proposed high-speed rail links connecting Bengaluru with Hyderabad and Chennai would primarily benefit Telangana and Tamil Nadu. He argued that a high-speed rail corridor linking Bengaluru with Pune and Mumbai would have been more advantageous for Karnataka's economic growth.
Broader Fiscal Context and State Reactions
The 16th Finance Commission's recommendations come amid ongoing debates over fiscal equity and state contributions to national revenue. Karnataka's case underscores the tensions between state expectations and central allocations, particularly in a politically charged environment. The state's leadership continues to voice concerns over perceived disparities, emphasizing the need for a more balanced approach to devolution that reflects economic contributions and developmental needs.
As Karnataka prepares for the enhanced devolution, the focus remains on how these funds will be utilized to address pressing issues such as infrastructure, irrigation, and regional development. The state's disappointment highlights broader challenges in India's fiscal federalism, where states often grapple with balancing autonomy and dependency on central grants.
