Karnataka's remarkable achievement of becoming the state with the highest per capita income in India has unexpectedly created a financial dilemma as the 16th Finance Commission prepares its recommendations for the 2026-2031 period.
The Income Paradox: Success Becomes a Liability
Earlier this year, Karnataka celebrated when Ministry of Finance data revealed the state had reached the highest per capita Net State Domestic Product in the country at Rs 2.04 lakh for 2024-25, showing significant growth from Rs 1.92 lakh in the previous fiscal year. This economic milestone, however, now threatens to reduce the state's share of central taxes.
The very schemes that boosted household incomes - particularly the government's guarantee programs like Gruha Lakshmi which provides Rs 2,000 monthly to women heads of families - have contributed to this paradoxical situation where success might lead to financial penalties.
Historical Precedent Raises Concerns
State finance officials expressed apprehension about potential reductions in tax devolution, citing the 23% reduction experienced under the 15th Finance Commission. Between the 14th and 15th Finance Commission periods, Karnataka's tax share plummeted from 4.713% to 3.647%, resulting in a staggering loss of approximately Rs 80,000 crore over five years.
A senior official from the state finance department explained the mechanism behind this concern: "One of the key parameters for tax devolution under the 16th Finance Commission is income distance, under which states with lower income levels get a higher share in taxes. Since Karnataka's per capita income has increased over the past few years, there are concerns that the tax share will be reduced further."
Broader Financial Implications
The financial challenges extend beyond potential tax share reductions. The central government's decision to deny Karnataka special funds worth approximately Rs 11,500 crore recommended by the Finance Commission has already created tension between state and central authorities. The Congress government had previously protested in Delhi over this issue.
However, not all officials share the pessimistic outlook. Another department representative expressed optimism, noting that Karnataka has presented a strong case before the commission highlighting the state's substantial contribution to national GDP and the fact that revenue from the IT services sector, which employs people from across India, doesn't fully flow back to the state.
The 16th Finance Commission, chaired by Dr. Arvind Panagariya, will see its recommendations take effect from the 2026-27 fiscal year, with the report scheduled for presentation during Parliament's Budget session in February 2026.
