The state of Karnataka has officially reached the maximum permissible limit for its fiscal deficit, set at 3% of its Gross State Domestic Product (GSDP) under the Fiscal Responsibility Act. This comes as the government's borrowings have surged to meet the expenditure commitments outlined in its budget for the 2025-26 financial year.
Budget Projections vs. Reality
While the state's budget documents for 2025-26 projected a fiscal deficit of 2.95% of GSDP, estimated at Rs 90,428 crore, the actual deficit has now touched the full 3% threshold. Senior finance officials attribute this slippage to a widening gap between the revenue collected and the money being spent.
The mid-term fiscal review indicates that revenue generation has fallen short of initial estimates. At the same time, spending pressures have continued to mount, largely driven by the implementation of the government's guarantee schemes and various welfare measures promised to the public.
Officials on Borrowing Trends and Fiscal Management
Ritesh Kumar Singh, the Additional Chief Secretary (Finance), confirmed that preparations for the upcoming budget are underway. He stated that the Chief Minister will need to decide on the approach for the next fiscal year amidst these constraints.
"We have begun preparations for this year's budget, and the CM will have to take a decision on how to approach the next fiscal," Singh said. He acknowledged that borrowings are expected to increase, potentially touching Rs 93,000 crore in the upcoming quarter, as indicated by a Reserve Bank of India (RBI) report. However, he sought to downplay alarm, calling it a recurring pattern.
"Each year our fiscal deficit grows and so does our borrowings. Traditionally, 75% of our borrowing happens in the fourth quarter. This year, it may be the highest," Singh explained. He contrasted Karnataka's approach with other states, noting that many spread their loans across all four quarters to manage cash flow and clear past liabilities.
"For example, certain states may have an overhang of two months from the previous fiscal's fourth quarter and may be forced to borrow heavily in the first quarter to clear bills," he said. "While Karnataka may have an overhang of two weeks in the first quarter of the new fiscal year, the financial management has been quite prudent from our end."
Chief Minister's Upcoming Budget Challenge
Chief Minister Siddaramaiah is set to begin preliminary work on what will be his record 17th state budget. However, he will be operating within a tight fiscal space, with limited room for new expenditures due to the deficit ceiling and rising demands on the state's treasury.
The budget is likely to be presented to the legislature either in the last week of February or the first week of March. The key challenge will be balancing welfare commitments with fiscal discipline, a task made more difficult by the current deficit position.
