The revenues of India’s top 18 states, which together account for 90% of the country’s Gross State Domestic Product (GSDP), are projected to grow by 8-10% in the current financial year, reaching a total of ₹38 lakh crore, according to a report by CRISIL Ratings. This growth comes on the back of robust Goods and Services Tax (GST) collections and financial devolution from the central government, which represent nearly half of the states’ aggregate revenues.
In the previous fiscal year, these 18 states experienced a revenue growth of 7%, as per CRISIL’s report. The current growth forecast reflects a significant improvement and is attributed primarily to the resilience of GST collections, which have remained strong, and the devolution of central taxes.
Key drivers of revenue growth: GST and central devolutions
According to Anuj Sethi, Senior Director at CRISIL Ratings, the most significant driver of revenue growth will continue to be state GST collections. This growth is supported by improved tax compliance and the formalization of the economy, both of which have led to a steady increase in GST revenue over recent years. GST collections have emerged as a vital source of income for state governments, constituting a large portion of their revenue streams.
The report highlights that central tax devolutions are expected to grow by 12-13% in the current fiscal year, providing a substantial boost to state coffers. These devolutions play a critical role in ensuring financial stability for the states, allowing them to maintain their expenditure on key areas such as infrastructure, social welfare, and healthcare.
Additionally, grants from the Centre, as recommended by the 15th Finance Commission, are projected to grow by 4-5%, aligning with the Union Budget’s outlay. While these grants form a smaller portion of the states’ revenues compared to GST collections and central tax devolutions, they are nonetheless crucial in supporting specific developmental and welfare projects.
Stable liquor revenues, modest petroleum taxes
The report also notes that revenues from liquor sales, which contribute approximately 10% to the total state revenues, are expected to remain stable during the financial year. Liquor sales have traditionally been a reliable and significant revenue source for state governments, and this trend is likely to continue.
However, revenues from sales tax on petroleum products are expected to witness modest growth, as global oil prices and domestic fuel demand remain subject to volatility. States levy sales taxes on petroleum products, which form a notable part of their revenue, but fluctuations in international oil markets can influence the collection amounts.
Challenges and opportunities for states
While the overall revenue outlook remains positive, the report cautions that state governments will need to focus on expanding their own revenue sources and improving collection efficiencies to sustain long-term growth. Currently, states rely heavily on the Centre for financial support, with central transfers accounting for almost 50% of their total revenues.
For many states, increasing own tax revenues — such as property taxes, stamp duties, and local sales taxes — will be critical to reducing dependency on central government funds. Additionally, improving tax compliance and ensuring the smooth functioning of the GST regime are key priorities for states to secure stable and growing revenue streams.
More Read
CRISIL Ratings has based its analysis on a projected real GDP growth of 6.8% for the financial year. This assumption is central to the revenue growth forecast, as economic growth typically drives higher consumption, business activity, and, consequently, higher tax revenues.
The road ahead for state finances
The expected growth in revenues will allow states to continue funding important development projects, while also managing deficits and maintaining fiscal discipline. However, CRISIL warns that states must remain vigilant about their fiscal health. In recent years, many states have faced pressure to manage growing debt levels, particularly as they ramped up spending during the COVID-19 pandemic.
Improving the efficiency of public spending, controlling deficits, and focusing on economic recovery measures will be essential for state governments to navigate this financial year. The emphasis on strengthening own revenues is particularly critical, as this would provide states with greater financial autonomy and reduce the risks associated with over-reliance on central transfers.
In conclusion, while the revenue growth forecast of 8-10% offers an optimistic outlook for the states, the need for reforms in tax collection and revenue generation remains a priority. As India’s economy continues its recovery, state governments are expected to play a pivotal role in driving growth, infrastructure development, and public welfare programs. The successful management of their revenues will be key to ensuring sustained progress across the country.
