Karnataka’s cities received just INR 4,972 crore in State Finance Commission (SFC) grants in FY 2026-27. That’s a fraction of the INR 34,052 crore that should have reached them. The 5th SFC report, submitted in November 2025, recommended a historic 60% of state revenues for local governments, split 25% for urban areas and 75% for rural. The state government accepted less: 50% overall, with 30% for urban areas and the remaining 70% for rural areas. Two welfare guarantee schemes and allocations to parastatal agencies eat into what the state counts as “devolution”, even though none of this money reaches a city government. Karnataka’s 327 Urban Local Governments (ULGs), which are home to almost one in every two Karnataka residents and rely on these grants for 40-75% of their revenues, are left to run on what remains.
The consequences are already visible. Karnataka now ranks last among comparable states in per-capita SFC grants to cities, at INR 2,244 against Kerala’s INR 6,251. Untied SFC grants — the flexible funding cities use to fix footpaths, install streetlights, and respond to other local needs — have collapsed by 87% over the past decade. Even the state’s other major funding lifeline, INR 18,483 crore in XVI Union Finance Commission grants for 2026-31, is now at risk. Access to these grants depends on holding municipal elections that roughly two-thirds of Karnataka’s ULGs currently lack.
A Slow Reversal of Karnataka’s Fiscal Decentralisation examines how a state once seen as a national leader in devolving money and power to its local governments is now reversing course. It sets out five recommendations for the fiscal empowerment of Karnataka’s cities: ensuring timely constitution of future SFCs, restoring untied grants, discontinuing the practice of counting welfare schemes as devolution, improving transparency in how devolution is reported and SFC recommendations are implemented, and holding overdue ULG elections.
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