Karnataka Budget: Socialist in Rhetoric, Aggressive Neoliberal in Reality

Karnataka chief minister Siddaramaiah has presented the state budget for a record seventeenth time. Predictably, supporters have praised it as an excellent budget, while critics have condemned it as anti-people. These reactions, however, have largely followed conventional partisan lines and have rarely been supported by substantive analysis or empirical evidence. The media, perhaps constrained by deadline pressures or influenced by the chief minister’s informal and close interactions with journalists during the budget session, has also largely responded with colourful and favourable headlines.

In addition to these routine reactions, the communal Bharatiya Janata Party (BJP) and sections of its supportive media attempted to portray the budget as “pro-Muslim,” despite presenting little or no evidence. Budgetary data, however, indicate that allocations for minority welfare has actually declined in actual value. This is noteworthy given that the Congress government came to power with substantial electoral support from the Muslim community, which constitutes more than 12% of the state’s population.

The continued marginalisation of this community is evident in the current budget as well. Similarly, approximately Rs 15,000 crore from the Scheduled Caste Sub-Plan and Tribal Sub-Plan (SCSP/TSP) – funds intended for asset creations and capacity building of Dalit individuals – has once again been diverted to finance the government’s flagship five guarantee schemes.

If the BJP were functioning as a responsible opposition party, it could critically engage with several structural policy choices in the budget that are anti-people. However, neither the BJP nor the Janata Dal (Secular) (JD(S)) raises substantive objections to these fundamental policy orientations. Their criticisms typically remain confined either to claims that sectors of their interest have received insufficient funding or to communal allegations that minorities have been favoured.

Similarly, the Congress party’s criticism of the Union budget presented by the BJP-led Union government rarely addresses the underlying structural policies embedded in it.

This convergence can be traced to the economic policy shift initiated in 1991. Under the leadership of the Congress party – and with strong support from the BJP and other political formations – India adopted neoliberal economic reforms that prioritised corporate capital. These reforms represent a departure from the constitutional vision of a welfare state.

The welfare state envisaged by the constitution is premised on equitable distribution of resources and the transfer of wealth from the affluent to the disadvantaged. It envisages common people as the engine of economic growth. The framing of agricultural, industrial, and taxation policies were expected to align with this objective. 

However, economic reforms implemented after 1991 makes a paradigm shift and keeps the welfare and growth of corporate capital as the engine of “growth". And welfare of the people has become the consequence of corporate growth and not the cause. Even the taxation policies have been structured to favour corporate interests.

This orientation was institutionalised through the Fiscal Responsibility and Budget Management (FRBM) Act, enacted in 2002 by the BJP-led National Democratic Alliance (NDA) government. Since then, successive governments – whether led by the BJP, Congress, or regional parties – have consistently adhered to its provisions and none of the political parties question this structural bias and thus their criticism of the budget remain superficial, and essentially complementary to the corporate-led development model.

Fiscal discipline, a corporate instrument to reorder marco economy

At a superficial level, the FRBM Act seeks to enforce fiscal discipline in public finance. While fiscal discipline is indeed necessary for effective governance, the form it takes under this framework warrants scrutiny.

The law mandates that governments reduce expenditure, increase revenue, and prioritise long-term developmental spending – capital expenditure. To that end revenue deficit is expected to be nil meaning the committed expenditure of the government –  administrative and welfare expenditures – including salaries, pensions, subsidies, and social support programmes – should remain within the limits of tax revenue. If expenditure exceeds revenue, governments are expected to reduce committed expenditure resulting in restricted recruitment, cutting staff, or reducing welfare commitments.

Another key provision requires that the fiscal deficit remain below 3% of the state’s gross domestic product (GDP), while total public debt must not exceed 25% of GDP. Resources saved through expenditure cuts are expected to be redirected toward long-term development spending, commonly categorised as capital expenditure.

However, the definition of development under this framework has remained largely consistent across governments since the early 1990s. Capital expenditure typically prioritises infrastructure projects that facilitate investment by domestic and foreign corporations rather than investments that directly support small farmers or SMEs.

Consequently, the notion of fiscal discipline effectively serves to align state resources with corporate interests while constraining public expenditure directed toward the economic needs of ordinary citizens.

In democratic contexts such as India, where the majority of voters belong to the lower and middle income groups, governments attempt to maintain the appearance of addressing popular concerns. This often takes the form of inflated promises that are unfunded or Siddaramaiah’s guarantee schemes that is financed by cutting or diverting other welfare expenses. Thus, even the five guarantees which are promoted as distributive initiatives end up not as additional source of income but as a substitute for the existing one. 

The role of the Medium Term Fiscal Plan (MTFP)

An important but often overlooked component of the budgeting process is the medium term fiscal plan (MTFP), which governments are mandated by the FRBM Act to present alongside the annual budget in compliance with the FRBM Act. This document outlines the government’s strategy for reducing expenditure, increasing revenue, and promoting investment-driven development over a five-year period.

In practice, the MTFP constitutes the substantive fiscal framework of the government. Unlike the political rhetoric of budget speeches, the MTFP is intended for financial institutions, international credit agencies, and organisations such as the International Monetary Fund and the World Bank. As such, it tends to provide a more direct articulation of fiscal priorities.

The MTFP 2026-30, as presented by the Siddharamaiah government, details how committed expenditure shall be reduced over five years and how state revenues shall be augmented by increasing User Charges and monetising state assets, with FDI kept as the engine of growth.

GST – Not just fiscal autocracy

The Karnataka government has argued that the state’s fiscal position has been adversely affected by the Goods and Services Tax (GST) regime implemented by the Union government. It has also criticised the perceived inequity in the distribution of central tax revenues. While these concerns raise legitimate federal issues, they do not necessarily address the broader implications of GST for ordinary citizens.

GST is fundamentally an indirect tax. Consequently, increases in GST revenue effectively represent an increased tax burden on consumers. Approximately 97% of GST collections arise from taxes paid by ordinary citizens purchasing everyday goods and services.

In many democratic countries, direct taxes – based on income – constitute a larger share of total tax revenue, thereby introducing greater progressivity into the tax system. By contrast, reliance on indirect taxation such as GST can exacerbate economic inequality.

Although GST was implemented by the BJP government, its conceptual origins can be traced to earlier policy proposals supported by the Congress party.

Why decreased rate did not yield increased revenue?

The Karnataka government has stated that revenue estimates from the state's own resources, as estimated in the 2025-26 Budget, have been reduced by Rs 10,000 crore due to a shortfall in anticipated revenue from GST. According to the government, a key factor contributing to this shortfall is the reduction in GST rates implemented by the Union government last September.

The policy rationale underlying the rate reduction was based on the assumption that though tax collections might decline in the short term, lower tax rates would reduce prices and stimulate consumer demand. Over time, the resulting increase in consumption was expected to generate higher overall tax revenues.

This argument, advanced by the Union government, was accepted by governments of all political parties in the GST Council, including the government of Karnataka. However, the anticipated increase in consumption did not materialise despite the reduction in tax rates. A primary reason for this outcome lies in the limited purchasing power of the general population. When incomes remain stagnant, reductions in taxes on commodities such as air conditioners, automobiles, or gold are unlikely to substantially increase consumer demand.

Although Karnataka’s average per capita income is approximately Rs 4.33 lakh – significantly higher than the national average of Rs 2.19 lakh – this aggregate figure conceals substantial regional disparities. For example, the average per capita income in Bengaluru district is around Rs 8 lakh, whereas in the Gulbarga region it is approximately Rs 1.4 lakh, which is about 50% lower than the national average. Moreover, within Bengaluru itself, a significant proportion of the population residing in urban slums has income levels comparable to those in economically disadvantaged regions such as Gulbarga.

These disparities indicate that without policies aimed at reducing income inequality and enhancing the purchasing power of ordinary citizens, reductions in GST rates alone cannot generate sustainable economic growth. Consequently, the development paradigm promoted by the central government – which assumes that tax reductions will automatically stimulate growth – appears structurally flawed. While the Karnataka government criticises the decline in state tax revenue resulting from GST rate reductions, it simultaneously avoids addressing the broader structural issue: the corporate-oriented economic policies that contribute to increasing socio-economic inequality. In this respect, even the self-described “socialist” leadership of the state refrains from critically engaging with the underlying economic framework.

Foreign investment as the engine of growth

Despite rhetorical emphasis on farmers, Dalits, women, and marginalised communities in the budget speech, the government’s economic strategy is clearly centered on attracting domestic and foreign corporate investment.

Siddaramaiah noted that Karnataka attracted approximately $67 billion in foreign investment between 2019 and 2025, attributing this achievement to policy reforms, infrastructure expansion, and an investor-friendly environment.

Such an environment typically involves the provision of subsidised land, water, electricity, and regulatory frameworks that minimise constraints on corporate profitability. This has contributed to accelerated land acquisition around Bengaluru, including regions such as Devanahalli, to facilitate industrial development and township projects. The historical farmers' movement in Devanahalli has also been betrayed by the Siddu government for facilitating aerospace and defence corridor driven by private multinationals. 

Many of these industries are capital-intensive and technology-driven, often relying on automation and artificial intelligence. While they may contribute to growth in the state’s GDP, their capacity to generate large-scale employment for local populations remains limited.

Reducing the welfare expenditure-KPS model

The 17th budget of Siddaramaiah, a disciplined soldier of fiscal discipline regime, has many implicit and explicit and ingenious methods of reducing welfare and committed expenditure. Although the Siddaramaiah government has announced the recruitment of 54,000 government jobs, the present budget does not allocate the additional financial resources required for these appointments. Instead, it introduces several policy measures that effectively reduce the overall number of government jobs.

In fact, the government sanctioned around 11 lakh posts which has been reduced to over seven lakh in the last decade through backlogs, abolishing posts or outsourcing as recommended by the successive Administrative Reforms Commissions (ARCs). Even within that only five lakh posts have been filled and 2.5 lakh posts are vacant. 

Among the approximately 2,50,000 vacant government posts, the largest category — around 80,000 posts — consists of school teachers. However, the government has already indicated, in accordance with the FRBM Act, that it intends to reduce government expenditure, particularly major commitments such as salaries and pensions.

Consequently, rather than filling the teacher vacancies, which would increase fiscal expenditure, the government appears to be pursuing a model that promotes the Karnataka Public School (KPS) framework. Through this KPS model, the Siddaramaiah government intends to build first class government schools in a single campus which teach from pre-School to pre-university in one campus with ADB funds. But the only glitch is for every KPS school, the governments has planned to merge , that is close down six-seven primary schools in five-six km vicinity of each KPS.

The policy declaration of KPS has declared that it would build 6000 KPS, one each for Gram Panchayat and this year 800 KPS are expected to come into existence. Thus the goal is to close down more than 30000 schools and hence 30000 teacher post permanently. While the government keeps on promising that no schools will be closed, recent reports suggest that teachers are coerced to convince parents for KPS arrangement or face punishments. 

Similarly, the filling of approximately 1,000 posts in higher education will occur only after “rationalisation,” implying that recruitment will take place only after a reduction in the number of sanctioned positions.

Furthermore, welfare programmes intended for economically disadvantaged populations will no longer be universally distributed among all the poor households. Instead, they will be restricted to targeted beneficiaries deemed to be in greatest need. Through the MTFP framework, Siddaramaiah has assured investors that by 2030 the government aims to reduce salary expenditure to 2.66% of GSDP and pension expenditure to 1.20% of GSDP.

Increasing non-tax burden on people

In its efforts to augment the state revenue, the Siddaramaiah government is adopting strategies comparable to those pursued by the Modi government and consistent with the fiscal constraints imposed by the FRBM Act. These strategies involve both direct and indirect mechanisms of revenue extraction from the public.

For example, a significant portion of the state government’s revenue derives from commercial taxes, which include the GST, taxes on petrol and diesel, and professional tax. In the previous fiscal year, the state had projected revenue collections from the commercial taxes to the tune of Rs 1,20,000 crore from these sources. However, owing to a reduction in GST rates, actual GST collections fell short by Rs 10,000 crore, resulting in total revenue of approximately Rs 1,10,000 crore.

Despite projections indicating that GST collections may decline by an additional Rs 15,000 crore in the forthcoming fiscal year, the budget nevertheless estimates that total commercial tax revenue will increase to Rs 1,25,000 crore. This projected increment of Rs 15,000 crore cannot plausibly be generated through GST alone, raising the question of whether the government intends to increase taxes on petrol and diesel, and what the broader economic and social consequences of such measures might be.

Furthermore, the state government constituted a Resource Mobilisation Committee with the objective of identifying strategies for increasing public revenue. The committee recommended primarily the enhancement of user charges for government-provided services and the improvement and monetisation of government-owned assets. In practical terms, these recommendations suggest the possibility of increased charges for services such as water supply, electricity, public transportation, and other public utilities.

The state government currently possesses approximately 11,191,070 acres of land. At the same time, nearly 3.2 million small and land less farmers across the state have submitted applications seeking land for cultivation. Nevertheless, rather than allocating this land to farmers, the government has planned asset monetisation and privatisation through mechanisms such as Infrastructure Investment Trusts (InvIT) and Public–Private Partnership (PPP) models, potentially transferring control of these assets to corporate actors in order to enhance government revenues.

In this context, the policy framework raises a broader question: whether these measures represent a continuation of conventional capitalist policy approaches, albeit presented under the discursive label of “socialist”. The chief minister reflects a policy orientation not fundamentally distinct from the broader economic framework associated with the ruthless neoliberal model of BJP at the centre. 

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