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Karnataka has increasingly moved towards financial centralisation in the past decade—a period that has seen both the BJP and the Congress in power—leaving local bodies with decreasing resources and agency to meet local needs.
In the past decade, Karnataka has increasingly concentrated financial resources in the state government, with untied funds – grants without conditions – to urban local bodies decreasing by a whopping 87% in the past decade, according to a recent report by the NGO Janaagraha.
Titled ‘A story of reversal of Karnataka’s fiscal decentralisation’, the report analysed the recommendations of the Fifth State Finance Commission (SFC) for the period 2026-27 to 2029-30 and the action taken on the report by the state government. The SFC submitted its report in November 2025.
The 5th SFC had recommended that 60% of state revenues be devolved to local governments, the highest so far. Of this, 25% was to go to urban local bodies – amounting to Rs 34,052 crore – and the rest to rural local bodies.
Janaagraha pointed out that this recommendation fell far short of the possible requirement when nearly every other person in Karnataka lives in an urban area. Since 2011, the number of cities and towns in the state has jumped by 49%, growing from 220 to 327. Despite this massive shift in where people live, the funding has not kept up.
The state government, however, did not accept the SFC recommendation and instead devolved only 50% of the state’s revenues for local bodies, giving urban local bodies 25% only for a population of 49%.
In comparison, Tamil Nadu provides 44% to 51% to its cities and Haryana gives 44% to 51% to its cities.
How little urban local bodies received and why
Janaagraha’s analysis of the devolution of funds in the state budget found that in the 2026-27 fiscal year, urban local bodies had been sanctioned just 14.6% of the Rs 34,052 crore recommended by the SFC.
Approximately a third of the Rs 34,052 crore had been directed towards two state guarantee schemes: Gruha Lakshmi (grants to women) and Anna Bhagya (subsidised ration). Rs 8,023 crore was allocated to parastatal agencies, which is 1.6 times higher than the money actually given to the cities themselves, the report said.
Despite repeated warnings from the CAG and previous SFCs that such transfers should not be counted as devolution to local governments, this continues, the report said.
After the welfare schemes, parastatals, and direct city grants are counted, about Rs 10,164 crore still cannot be clearly identified or verified in available state budget documents, the report said.
The report also found that untied grants – grants without conditions – to local bodies have all but disappeared in the past decade. Untied grants dropped 87% from Rs 988 crore to Rs 75 crore in the decade up to fiscal year 2026-27.
“City governments are fiscally squeezed, paralysing their efforts to provide basic urban services” the report said.
Impact of decreasing resources, agency
The denial of flexible funds has resulted in delivery gaps that affect the health and dignity of millions of urban residents.
The 5th SFC recommended that at least 50% of grants to urban local governments should be untied. The state rejected that idea and the result is that only 2% (Rs 75 cr) of total SFC transfers now comes in the form of flexible money. It represents a 61% drop from the previous year and is 87% below the average during the 4th SFC period, the report said.
The report pointed out that 77% of Karnataka’s cities lack any sewerage network coverage. Only a tiny 7% of cities have both a functioning sewerage network and a treatment plant, and 51% of cities fail to meet the national water supply benchmark of 135 litres per capita per day. Instead, average citizens receive just five hours of water a day and nearly half of the state’s urban centers (49%) have not achieved scientific disposal of solid waste, leading to environmental and public health risks.
The crisis is most visible in Karnataka’s major urban hubs, where untied grants have fallen by more than 90% in the last 12 years.
Mysuru, which was once a leader in urban planning, has seen its flexible budget shrivel from Rs 43 crore in 2014-15 to a paltry Rs 3 crore today. The coastal hub of Mangaluru has been left with a mere Rs 1 crore, down from Rs 22 crore a decade ago. Hubballi-Dharwad’s flexible funds crashed from Rs 47 crore to just Rs 3 crore. And in Kalaburagi, it has dropped from Rs 27 crore to just Rs 2 crore.
The reason for this collapse is that nearly 90% of all state grants are now used for committed expenditures, costs the city has no choice but to pay, like doubling electricity bills and municipal staff salaries, so that there is virtually nothing left for actual development or maintenance.
While the numbers in big cities are shocking, the impact is harsher for smaller towns, where local bodies rely on state grants for 75% of their total revenue. Without untied funds, these towns have no financial cushion to maintain existing infrastructure, run local programmes, or respond to any emergency.
Other funds lost
Karnataka’s failure to hold local elections is costing cities real money, the report said. Urban funding amounting to Rs 18,483 crore from the 15th Finance Commission over five years is tied to one basic condition – only cities with elected councils get funds.
Across Karnataka, 13 of 18 city corporations are currently being run without elected councils, the report said. That means major urban bodies are making decisions without the democratic mandate.
Bengaluru’s erstwhile BBMP reportedly lost about Rs 964 crore in earlier grants because elections were delayed. Another Rs 140 crore for 2026-27 is now stuck for Mysuru and Mangaluru alone.
This story was written by a student interning with TNM.
