Karnataka seeks hike in devolution of funds from Centre to 50%, more weight to a State's economic performance
To overcome a stark imbalance in the devolution of funds to Karnataka from the Centre, Chief Minister Siddaramaiah on Friday demanded that the share of taxes devolved to States (vertical devolution) be increased to at least 50%, and cess and surcharges be capped at 5% in the 16th Finance Commission (FC).
He also sought support for ₹1.15 lakh crore investment to strengthen Bengaluru's infrastructure, given its major role in Karnataka's economy.
Bridging regional gaps
During a meeting with the 16th FC Chairman Arvind Panagariya and panel members in New Delhi, the Chief Minister highlighted the need to bridge regional gaps in Kalyana Karnataka and Malnad, which earn low incomes and have poor infrastructure.
The State recommended including Union non-tax revenues in the divisible pool. For sharing funds among States (horizontal devolution), Karnataka suggested that each State retain about 60% of what it contributes, with 40% going to less-developed States, ensuring both growth and equity.
To make the formula fairer, Karnataka has proposed reducing the weight of the income-distance criterion and giving more weight to a State's economic contribution, so that high-performing States are not penalised, but encouraged.
In its memorandum to the FC, Karnataka has called for critical reforms to make the fiscal devolution system more growth-oriented, predictable, and fair.
Three key issues
The State has highlighted three key issues such as the growing disparities in per-capita devolution, the flawed design of revenue deficit grants, and the unpredictable nature of State-specific grants.
The Chief Minister said that for every rupee Karnataka contributes to the Union taxes, it receives only 15 paise in return. The reduction in Karnataka's share under the 15th FC from 4.713% to 3.647% has resulted in a cumulative loss of over ₹80,000 crore during the award period.
Karnataka played a pivotal role in India's economic growth, contributing nearly 8.7% of the national GDP with just 5% of the population. It ranked second in GST collections, he said.
Big drop in devolution
Mr. Siddaramaiah said Karnataka's per capita devolution has dropped significantly, from 95% to 73% of the national average between the 14th and 15th Finance Commissions, despite increased GDP contribution.
While noting that equity remained a key principle, he said it must be implemented in a time-bound and outcome-oriented manner, without disadvantaging States that demonstrate strong economic performance and sound fiscal management. He said that the income-distance weightage should be reduced by 20% and the same should be reallocated to reflect the States' fiscal contribution, as measured by their share in the national GDP.
Mr. Siddaramaiah recommended replacing discretionary special grants with a formula-based allocation of 0.3% of gross Union receipts. However, he reiterated the request for grants for Bengaluru and other critical projects if the commission continues with such provisions.
The Chief Minister emphasised that growth and equity must coexist, and that a strong Karnataka supported by fair fiscal devolution was essential for a strong India. 'Karnataka's fiscal strength fuels national growth. It is time to ensure that growth is not penalised but rewarded. We urge the commission to adopt a balanced, forward-looking approach to devolution,' the Chief Minister said.
The FC's award period commences on April 1, 2026.
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