Karnataka's finance department has alerted the government to its precarious fiscal situation, citing an almost depleted borrowing capacity and a substantial revenue deficit of approximately ₹23,000 crore. The state is burdened with over ₹2 lakh crore in pending works and faces additional financial strain from the current drought, which is projected to escalate subsidy costs.

Karnataka's finance department has alerted the government to its precarious fiscal situation, citing an almost depleted borrowing capacity and a substantial revenue deficit of approximately ₹23,000 crore. The state is burdened with over ₹2 lakh crore in pending works and faces additional financial strain from the current drought, which is projected to escalate subsidy costs.

Karnataka's finance department has alerted the government to its precarious fiscal situation, citing an almost depleted borrowing capacity and a substantial revenue deficit of approximately ₹23,000 crore. The state is burdened with over ₹2 lakh crore in pending works and faces additional financial strain from the current drought, which is projected to escalate subsidy costs.

Karnataka’s finance department has cautioned the government against taking on major new projects, flagging a near-exhausted borrowing capacity, a revenue deficit of nearly ₹23,000 crore and a backlog of pending works running into more than ₹2 lakh crore.

In a note dated September 17, the department said the state may not have the fiscal space to fund new projects of a similar magnitude, given its existing financial commitments, mounting pending bills and the additional expenditure expected from the drought.

The note, bearing file number FD 317 EXP6/2026 / RDPR 298/RRC/2026 (P-1), said Karnataka’s fiscal deficit for 2026-27 is projected at 2.95 per cent, close to the 3 per cent limit under the Fiscal Responsibility and Budget Management framework.

The state is also facing a revenue deficit of ₹22,957 crore, even though the FRBM (Fiscal Responsibility and Budget Management Act, 2003) framework envisages a zero revenue deficit. Its cumulative liabilities have reached 24.94 per cent of GSDP, leaving the state just short of the 25 per cent FRBM limit.

Against this backdrop, the finance department said Karnataka had “virtually exhausted” its borrowing capacity to finance the announcements made in the 2026-27 Budget and may not have the fiscal space for projects of the proposed magnitude.

The warning comes when the government already has a substantial pipeline of unfinished and financially committed works. The balance cost of ongoing works across departments exceeds ₹2 lakh crore, while pending bills in four major departments — Public Works, Water Resources, Minor Irrigation and Rural Development and Panchayat Raj — amount to ₹36,136 crore.

At the same time, the government has continued to approve new projects. During the first six months of 2026-27, projects worth more than ₹5,000 crore have already received approval, including works under SE-1. The finance department noted that funding for these projects had not been identified beyond the revenues projected for the current financial year.

Several departments have also placed additional demands for funds before the finance department. These include Water Resources, Energy, Commerce and Industries, Urban Development and Transport.

The financial pressure could intensify because of the drought gripping large parts of Karnataka. The state may require substantial additional expenditure for farmers, rural livelihoods, drought relief and drinking water. The eventual requirement would also depend on the Centre’s response to the memorandum submitted by the state seeking drought assistance.

The finance department has separately estimated that the drought could increase the state’s subsidy burden on irrigation pump sets by ₹4,000-5,000 crore.

This could have a cascading effect on other departments. According to the note, meeting even part of the funding requirement for new proposals could require cuts or reallocation of funds meant for other departments, potentially delaying or halting works that have already been planned.

The department has also flagged cash-flow problems among transport corporations, irrigation corporations and electricity companies, including difficulties in meeting salary-related requirements. Subsidy payments have already seen defaults and delays in monthly disbursements.

Against this financial backdrop, the finance department advised the government to be realistic about the available funding envelope and cautioned against adding further to the existing backlog of works.

It said funding new projects would be difficult until additional resource mobilisation or reallocation of existing approved allocations was finalised. The department suggested that the government wait until resources for the proposed project were identified before proceeding with funding.

Despite the reservations, the proposal is set to move forward for consideration by the Cabinet. As per Chief Minister D.K. Shivakumar’s direction, the administrative department has been asked to place the proposal before the Cabinet along with the finance department’s observations.

The episode puts the government in a difficult fiscal position: while new infrastructure and development projects remain on its agenda, the finance department has warned that the state’s existing commitments, rising subsidy burden and the emerging cost of drought relief are already stretching its financial capacity. Replying to the press person’s questions on this caution, CM Shivakumar said, “This is a normal caution from the department and being a finance minister, I will review and handle the situation.”  

Meanwhile, opposition has got another point to attack the government.

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