Karnataka’s economy grew more rapidly than the national average, clocking a growth rate of 12.9 per cent. The national Gross Domestic Product (GDP) grew at eight per cent, according to the Medium Term Fiscal Plan report tabled during Karnataka’s budget on Friday.

“At current prices, Gross State Domestic Product (GSDP) is projected to increase from Rs 29,06,063 crore in 2024–25 to Rs 32,81,065 crore in 2025–26, registering a growth of 12.9 per cent compared to 12.0 per cent in the previous year. This growth rate is higher than the national GDP growth rate of 8 per cent (AE) for the country, reflecting the state’s strong economic fundamentals and sustained policy efforts to accelerate economic expansion,” the report said.

The growth is attributed to several factors, including the success in securing 6.57 lakh crore investment over the past years, according to the report.

It highlighted the reduction in the Centre’s transfers to the state over the past decade.

“While Central transfers constituted about 32.1 per cent of total receipts in 2017-18, their share is projected to moderate to 25.1 per cent by 2026-27 (BE). Correspondingly, the share of State Own Revenue Receipts is expected to increase from 67.9 per cent to 74.9 per cent over the same period,” it noted.

In contrast, at the national level, states “rely more heavily on Central transfers, which account for 43.4 per cent of total revenue, while own revenue contributes 56.6 per cent,” the report said.

It flagged the reduction in Goods and Services Tax (GST) revenue to the state government as the Central Government implemented GST rationalisation in the middle of the year in September 2025. “Prior to rationalisation, the State’s average monthly GST growth in 2025–26 was around 10 per cent. Following rationalisation, average monthly growth has slowed down sharply. September to January 2025–26 (which was impacted by GST rationalisation) year-on-year growth in GST collections is moderated to around 4 per cent, compared to 11 per cent during the corresponding period of the previous year,” as per the report.

Absence of a structured revenue protection framework during rate rationalisation “has pushed the states towards another fiscal cliff”. Given the high dependence of states on GST and limited flexibility to mobilise alternative revenues, such revenue compression will necessitate compression of developmental expenditure for many states, it said.

“The demand of the states that they be fully compensated through a mechanism akin to the earlier GST Compensation Cess is now substantiated by the Unions own GST estimates showing a shortfall of about Rs 2 lakh crores in the Union Budget 2026-27. The State will continue to press for a fair and adequate compensation from the Union Government for revenue losses arising from GST rationalisation,” the report added.