What you are checking on the brake pedal is slack at the linkage/pushrod going up into the master cylinder. There has to be a gap to allow the piston to fully retract.
Lots of threads on this check and the problem in general. If gap is not the problem, I'd be pulling the wheel and doing some inspection and cleaning on the caliper. The slide pins and pistons can get grunged up. For my money, go ahead and put seals in the caliper, fresh fluid and bleed.
KTMs--300, 450, 990