Behind Karnataka’s Tidy Debt Story Lies a Grainier Fiscal Reality
Karnataka CM Siddaramaiah
Karnataka’s fiscal discipline masks a weakening revenue base—without confronting this shadow, public services will steadily erode.
By P SESH KUMAR
New Delhi, October 3, 2025 — Karnataka’s official books still tell a tidy story—disciplined debt ratios, a fiscal deficit parked close to the FRBM railings, and a plan to claw back capex. If we step behind the curtain, the picture gets grainier.
Off-budget borrowings have fattened the state’s true leverage, government guarantees and “free” utilities behave like revolving liabilities, and hidden subsidies creep through public-sector balance sheets. The health system is nursing arrears; law-and-order capacity is thinned by vacancies; and the 2023-24 and 2024-25 numbers show a structural revenue gap that reformist rhetoric hasn’t closed.
The CAG’s decadal volume and Arun Jaitley National Institute of Financial Management’s (AJNIFM) Public Financial Performance Index (PFPI) remain useful mirrors-but they are still mirrors of what is on record. The real Karnataka story is the shadow cast by what isn’t.
Karnataka’s fall from surplus grace is no longer in dispute; it is documented. The state swung from a revenue surplus in 2022-23 to a revenue deficit of ₹9,271 crore in 2023-24, even as the fiscal deficit widened to ₹65,522 crore.
The CAG’s State Finances report for 2023-24 pins the change on a stark mismatch: receipts grew ~1.9% while expenditure jumped ~12.5%, with the new guarantee-style welfare commitments chewing a conspicuous hole in the revenue account.
That gap didn’t just appear in the ledgers; it was financed in the usual way-market loans and central lines-leaving a net ₹63,003 crore from market borrowing to bridge the year’s hole.
The 2024-25 budget doubles down on this reality. It openly budgets a revenue deficit of ~1% of GSDP (₹27,354 crore) and a fiscal deficit of ~3% (₹82,981 crore), while acknowledging that committed spending-salaries, pensions, interest-dominates the flow.
This is not a one-off cough; it’s a new breathing pattern. When the state normalises revenue-deficit budgeting, capex inevitably becomes the pressure valve, however many speeches promise otherwise.
Now, let us move to the part the headline ratios don’t capture. First, the stock of off-budget borrowing already swelled in the 2022-23 base, when “indebtedness including off-budget borrowings” was flagged at ₹17,306 crore in the Accounts at a Glance.
That’s historical, but it matters because it sets the true starting line for a state that, one year later, leaned harder on borrowings to pay today’s bills. Off-budget paper does not vanish just because it isn’t tallied on the face of the Budget.
Second, guarantees and hidden subsidies behave like quasi-debt. The five marquee guarantees-cash to women heads of households, free bus travel for women, enhanced rice entitlements, free power up to a slab, and unemployment support-consumed roughly 15% of revenue expenditure in 2023-24, per the audit coverage reported across national dailies when the CAG tabled its report.
That’s not rhetoric; that is the flow effect that turned a surplus state into a revenue-deficit state in twelve months.
Third, the health-system arrears and law-and-order vacancies tell you where this squeeze lands in the real world. Karnataka’s hospitals and schemes have been grappling with unpaid claims—recent reporting details eight years of dues under RBSK that pushed some private empanelled facilities to suspend treatments; earlier cycles recorded hundreds of crores pending even in government facilities under the Ayushman Bharat–Arogya Karnataka umbrella.
When cash is tight, reimbursements slip; when reimbursements slip, service quality and participation slip.
Vacancies are the other leak. Across departments, protests now cite “three lakh vacant posts” as a political rallying cry; within the police force alone, the state has publicly acknowledged more than 18,000 vacancies, with Bengaluru city policing short by ~3,800 hands. One doesn’t need a macro lecture to decode the consequence: fewer beat cops, slower investigations, thinner coverage.
Vacancies are convenient for budgets because salaries are “committed”-but they are a stealth cut to the state’s core functions.
Karnataka’s capital backlog gives the fiscal-quality story another edge. Big water and irrigation schemes-the projects that create tomorrow’s tax base-keep running late and over budget. The political economy here is textbook: as revenue heads harden, governments re-profile capex, push completion out, and hope for a better Q4.
The result is stranded capital and rising cost escalations, which the CAG flagged explicitly in 2023-24: the diversion from capital to schemes and the swelling pile of incomplete works are not abstract-they are the compounding cost of a short-term revenue stance.
Does the PFPI capture this? Partly, and therein lies the point. Karnataka’s composite PFPI score (2023–24 edition) placed it in the top third on the strength of its resource mobilisation and controlled debt stock-an honest reflection of the pre-guarantee years through 2021-22. But PFPI’s window ends before the welfare tide of 2023–24 and the budgeted drift of 2024–25.
If we reran the index with the new revenue-deficit posture, the squeeze in capital outlay, and service-delivery symptoms-arrears in health claims, large safety-vacancies-we would almost certainly see Expenditure Quality and Deficit Management weaken, nudging Karnataka toward mid-table. PFPI remains useful as a structured baseline, but it is not a living ECG. It can understate the now. (That’s a design limitation, not malice.)
And what about the CAG’s decadal State Finances? Invaluable for trend-sense and cross-state comparison, but intrinsically conservative: it freezes the frame at 2022-23, the year before the guarantees fully hit, and it works with what passes through government accounts.
Off-budget liabilities, PSU-level subsidies, and delayed reimbursements often lurk outside that cone of light. We can see the scar tissue-the jump from surplus to deficit, the shift in financing-but you can’t see the whole anatomy of hidden burdens unless we stitch the audit to scheme-level arrears, entity-level debt, and payroll vacancy data.
That stitching is precisely what most public debates skip.
The bottom line is less dramatic than headlines and more worrying than spin. Karnataka still has the bones of a resilient state-deep tax base, manageable recorded debt, and the administrative capacity to course-correct.
But a sustained revenue-deficit stance for 2023-24 and 2024-25, financed by heavy borrowing, layered on top of prior off-budget paper, with guarantees that function like semi-permanent entitlements, is a slow-acting solvent.
It dissolves fiscal flexibility first, then service delivery. We would notice it when a child can’t get a surgery reimbursed on time; when a police station operates two beats short; when the road that was “80% complete” is still “80% complete” next monsoon.
Karnataka can absolutely pull itself back. The route is not mysterious: tell the full truth about liabilities (on-book and off-book), hard-cap the drift of revenue schemes unless matched by verified beneficiary rolls and buoyant receipts, publish a guarantee-risk statement alongside the Budget, and ring-fence capex with execution schedules that can’t be raided mid-year. None of this abolishes welfare; it tethers it to arithmetic.
The state’s present narrative-a carefully tended debt ratio coexisting with an eroding revenue position-only works if the shadow side is acknowledged and narrowed. If not, the numbers will keep balancing on paper while the services thin out in practice.
(This is an opinion piece, and views expressed are those of the author only)
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