The Karnataka government is staring at a significant reduction in its budget size for the upcoming financial year 2025-26. Senior state officials have indicated that a downward revision of approximately 6% is now considered inevitable, primarily due to a looming massive revenue shortfall. The budget, initially estimated at a record Rs 4.09 lakh crore, is now expected to be trimmed to around Rs 3.85 lakh crore.
A Trend of Downward Revisions
If this revision goes through, it will mark the third consecutive year that Karnataka's budget outlay has been reduced from its original estimate. This persistent trend starkly contrasts with the fiscal year 2022-23, which saw a healthy 9% upward revision. The current fiscal year (2024-25) saw a 1% cut, while the previous year (2023-24) witnessed a 3% reduction.
The most direct consequence of this belt-tightening will be a proportional cut in capital expenditure—the funds allocated for development projects like infrastructure, which are crucial for long-term economic growth. With committed expenditures like salaries, pensions, and politically sensitive welfare schemes off the table, development spending becomes the "soft target" for finance managers.
The Root Causes: GST Changes and Sectoral Slowdown
Government advisors point a finger squarely at the Centre's GST rate rationalisation as the primary culprit for the financial distress. The restructuring of the tax slabs from four tiers to a simpler two-slab structure is projected to cause a revenue shortfall of about Rs 9,000 crore for Karnataka from commercial taxes alone.
Compounding this issue is the Centre's decision to levy cess on luxury and sin goods without sharing the proceeds with states, which is estimated to dent Karnataka's coffers by another Rs 9,500 crore. Beyond GST, a slowdown in the real estate sector and technical glitches in the e-khata portal have led to a 1% decline in property registration revenues compared to last year.
Mixed Signals from Revenue Departments
Amid the gloom, a few departments show resilience. The Excise department has been a bright spot, collecting Rs 19,670 crore by September against an annual target of Rs 40,000 crore. The Transport department, however, has achieved only 38.7% of its Rs 15,000 crore target so far.
Officials like Mullai Muhilan, Inspector General of Registration, express hope for a "remarkable recovery" in the last two quarters of the fiscal year. However, the finance department remains cautious, with Principal Secretary Ritesh Kumar Singh stating that revenue trends in December and January will be crucial before deciding on any corrective measures.
Political Blame and Future Implications
The state's economic leadership has expressed frustration, noting the irony of a budget crisis amidst robust state economic growth. Basavaraj Rayareddi, the Chief Minister's Economic Adviser, did not mince words: "The state finances are really in a difficult condition with our revenues spiralling down... Ironically, this is despite the robust economic growth in Karnataka and blame is on the wrong steps taken by the Centre in the guise of taxation reforms."
This year's cuts are expected to have a spill-over effect, potentially stagnating growth into the next fiscal cycle. Even as Chief Minister Siddaramaiah begins preliminary work on the 2026-27 budget, the shadow of this year's shortfall looms large. The finance department is reportedly considering issuing an advisory to all departments to prioritise their expenditure strictly for the remainder of the year.
