Karnataka Budget 2026-27: Share of Central funds decreasing by the year adds to fiscal pressure

The share of Central transfers — including tax devolution, Central grants and funding for Centrally-sponsored schemes — in Karnataka’s revenue receipts is coming down significantly.

Data part of Medium Term Fiscal Plan (MTFP), presented by Chief Minister Siddaramaiah as part of the 2026-27 Budget documents on Friday, shows the share of Central transfers in the State’s resource envelope reduced from 32.1% in 2017-18 to 25.1% in 2026-27, a big drop of 21.8%. During the same period, the share of State’s own revenues in the resource envelope increased from 67.9% to 74.9%. 

The MTFP further shows for the year 2023-24, Karnataka’s revenue had only 24.3% from Central transfers even as the All India Average for States that year was 43.4%. Data shows the trend has been the same even when BJP was in power in the State.

Composition of State’s revenue receipts 

Drop in share of central transfers: 21.8% 

16th FC relief

The decreasing share of Central transfers to the State is despite the 16th Finance Commission Report providing some solace revising the State’s share in the tax pool from 3.64% to 4.13%. However, this is still lower than the recommendation of the 14th FC, which pegged the State’s share at 4.71%. 

While this shows that over the last decade State’s Own Revenue has grown at a compound annual growth rate (CAGR) of approximately 11%, “reflecting sustained economic growth, improved tax buoyancy and strengthened revenue mobilisation efforts”.

Mr. Siddaramaiah and several opposition-ruled State governments in the South India have been consistently arguing that the BJP-led NDA regime in Delhi has been showing a “step-motherly treatment” to these States. Congress MLAs in the State had held a protest against the Union Government in Delhi, led by the Chief Minister himself, in February 2024.

Central schemes’ burden 

A combination of factors and changes in centrally sponsored schemes are also adding further fiscal pressure on the State.

For instance, Chief Minister Siddaramaiah on Friday pointed out that under the new The Viksit Bharat—Guarantee for Rozgar and Ajeevika Mission (Gramin) (VB—G RAM G) Act, 2025, the share of Centre and State has been fixed at 60:40, down from 90:10 under the Mahatma Gandhi National Rural Employment Guarantee Act, 2005, that it replaces. It imposes an additional burden of approximately ₹2,000 crore on the State, he said.

Delay in releases

Delays and shortfalls in the release of Central funds under Centrally sponsored schemes have imposed significant cash-flow pressures on the State, the MTFP said. The Chief Minister pointed out in his Budget speech on Friday that the Centre had an outstanding of ₹19,102 crore for works taken up under Jal Jeevan Mission Scheme in Karnataka and it did not release any funds in 2025-26. Grants amounting to ₹15,500 crore have been released additionally by the State government in the interest of this scheme, he said.

State top-up

Further, the lack of periodic revision of unit costs has led to a growing incidence of State having to increase funding for Centrally-sponsored schemes through a top-up, particularly in respect of honorariums and incentives for frontline workers.

Central contributions towards these honorariums have remained unchanged for extended periods despite rising living costs and expanded responsibilities, the MTFP says. As a result, the State ends up having to fund ₹1,917 crore. The State top-up is often done in response to protests by frontline workers demanding revision of pay.

Social security coverage

Likewise, expenditure pressures have intensified due to the expansion of social security coverage and the limited extent of Central cost-sharing in key pension schemes, MTFP points out. Under the National Social Assistance Programme (NSAP), the Centre currently supports only 14.14 lakh beneficiaries in Karnataka, while the State covers an additional 80.31 lakh beneficiaries. As per the Revised Estimates of 2025-26, the social security pension expenditure is pegged at ₹10,668 crore, of which the Centre is only giving around 6% of the bill, ₹639 crore, data shows. 

“The limited coverage and stagnant quantum of Central support under social security and related schemes have substantially shifted the fiscal responsibility to the State, underscoring the need to expand NSAP coverage to at least 50% of beneficiaries and enhance the Central contribution to reduce recurrent fiscal pressures,” the MTFP argues.