Karnataka estimated a revenue deficit of ₹19,262 crore at the start of the 2025-26 fiscal year. Now, the deficit is expected to grow due to GST rate cuts and delayed tax collection from mines. The 2025-26 budget had planned to reduce the deficit from 0.96% to 0.63%. The government hoped to end the revenue deficit by 2027-28. However, the Mid Year Assessment of the Medium Term Fiscal Plan warns that lower revenue collections will increase the deficit this year. GST rationalisation may cause a ₹9,000 crore revenue shortfall. Additionally, a non-merger of Cess causes a loss of about ₹9,500 crore. The 2025-26 budget forecasts revenue expenditure of ₹3.11 lakh crore against receipts of ₹2.92 lakh crore, in a total budget of ₹4.09 lakh crore. In the first half, Karnataka recorded a small revenue surplus of ₹68 crore, with spending at ₹1,28,924 crore and receipts at ₹1,28,987 crore. Capital expenditure rose 32.3% in this period compared to last year. The Union Finance Ministry estimates Karnataka's GSDP at ₹30.91 lakh crore for 2025-26. The state’s rising spending on guarantees and welfare schemes has increased revenue expenditure. The GST rate cuts have further strained finances, reducing fiscal capacity as noted in the assessment. The GST compensation scheme ended in 2022, making states fully responsible for shortfalls. Karnataka’s GST to GSDP ratio dropped from 3.5% in 2020 to 2.4% in 2024, still below pre-GST levels. The SC-directed Karnataka Mineral Rights and Mineral Bearing Lands Tax bill, 2024, which would generate ₹3,000 crore from mines, awaits Presidential assent, delaying tax revenue. Non-tax revenue rose to ₹9,827 crore in the first half of 2025-26 from ₹6,624 crore last year. Own tax revenue also grew from ₹84,945 crore to ₹90,981 crore. Centre’s grants fell by 38.2%, from ₹8,309 crore to ₹5,139 crore in the first half. Despite challenges, the state’s revenue and fiscal deficits remain manageable. The government plans to cut non-essential spending, boost its own tax revenue, and protect key development funding. FDI inflows into Karnataka surged 149.3% year-on-year in Q1 of 2025-26, reaching $5.6 billion out of India's $18.6 billion total. In 2024-25, the state received $6.6 billion, 13.2% of the nation’s total FDI equity inflows.