GST rationalisation likely to impact Karnataka’s Budget size

With preparations under way for the State Budget to be presented on March 6 amid GST rate rationalisation pinching revenue collection, the Karnataka government is not only expecting a widening fiscal deficit, but also the overall goal of having a nominal revenue surplus Budget slip away by a couple of years. As the revenue has been hit considerably owing to GST rate rationalisation, the overall Budget size is also expected to shrink nominally over the 2025-2026 outlay.

“We were hoping to be a marginal revenue surplus State by 2027-2028. The GST issue alone has actually pushed that target further away. Whenever there is a revenue shortfall, the size of the Budget comes down proportionately,” a government source, who is part of the Budget preparations, told The Hindu. “The revenue loss from GST alone next year is estimated to be at least ₹16,000 crore. If not, we would have been very close to revenue surplus.”

Chief Minister Siddaramaiah, who holds the Finance portfolio, will be presenting his record 17th Budget next month.

Over two Budgets

In 2023-24, when Mr. Siddaramaiah presented the first Budget of the Congress government in the current tenure that had allocations for guarantee schemes, the estimated revenue deficit was about ₹12,523 crore, which came down to about ₹8,000 crore in revised estimates.

The revenue deficit in 2024-2025 was estimated to be about ₹27,354 crore but ended up to be a little less than ₹20,000 crore. In 2025-2026, the revenue deficit, which is estimated to be around ₹19,262 crore, is expected to widen with GST losses and slowdown in revenue collection in Stamps and Registration Department.

“When there is reduction in revenue, the revenue deficit will definitely expand. We do not know where the deficit will end this year.”

While the State government is watching the economy to see how the rate rationalisation is behaving and if it could compensate with more consumption, Finance officials say it is difficult to predict and could take at least three quarters to understand the trend. “There has been various disruptions in the overall consumption pattern. By February-end, we would know how these disruptions are impacting the economy.”

Generally, Karnataka has reported 98% to 102% range in fiscal marksmanship, which is the ratio between actuals and estimates. “A deviation by 1% or 2% is not much. We have the distinction in the country to be generally almost accurate,” said an official

Outlay to be impacted?

With the reduction in GST collection severely impacting revenue collection, sources indicated that there is a possibility of the Budget size also shrinking, if the revenue collection does not increase. According to the official: “Even if the Budget size comes down by ₹10,000 crore in 2026-2027, it would constitute less than 2.5% of the 2025-2026 Budget outlay of ₹4.09 lakh crore. This is not much.”

When asked if Karnataka will try to exhaust all options to raise revenues, the official said: “That is a big challenge that we have to collectively brainstorm about. The exact shortfall and what and how the government wants to deal with it will be decided by the first week of March. It is not just about collection, but also about controlling the expenditure.”

Departments asked to hike user fee, cess

The State government, which has to juggle between revenue shortfall and commitment to fund flagship guarantee schemes, is likely to look at options for raising revenues, especially the non tax revenue side. While over the last two years several departments have increased fee, cess and user fees among others, the government has asked departments that have not done so to increase them in accordance with the prevailing inflation.

Noting that the revenue from non-tax revenues has not increased over the years, departments have been asked to collect dues and go for recovery of loans. It has been pointed out that the government is getting money for investment on capital from markets at a higher rate of interest and returns on such investments have been extremely low.