The revenues of India’s top 18 states, which together account for 90% of the nation’s gross state domestic product (GSDP), are expected to grow by 8-10% during the current financial year, according to a report by CRISIL Ratings. The aggregate revenue of these states is projected to reach ₹38 lakh crore, reflecting robust economic momentum despite various fiscal challenges.
Revenue growth driven by GST and central devolution
The growth in state revenues will be largely driven by two primary factors: Goods and Services Tax (GST) collections and the devolution of finances from the Centre, which collectively make up around 50% of the total revenues for these states. In the previous fiscal year, the states’ revenues had grown by 7%, but this year’s higher growth is attributed to stronger GST collections, reflecting greater formalization of the economy and improved tax compliance.
Anuj Sethi, Senior Director at CRISIL Ratings, noted that the most significant contributor to this growth will be aggregate state GST collections, which continue to benefit from reforms that have improved tax compliance and broadened the tax base. The formalization of previously unorganized sectors and enhanced digital tracking mechanisms have played a key role in bolstering these collections.
Stable liquor revenue, modest petroleum sales tax
While liquor sales contribute about 10% of the states’ overall revenues, this revenue stream is expected to remain stable, offering no significant surprises in growth. On the other hand, sales tax on petroleum products, which has been a volatile revenue source in the past due to fluctuating global oil prices, is expected to see only modest growth this year. High petroleum prices have historically been a sensitive issue, influencing inflation and consumer spending, but this revenue is expected to remain steady rather than driving the overall revenue increase.
Grants from the Centre, recommended by the 15th Finance Commission, will also contribute to the states’ revenue. However, the report projects these grants to grow by only 4-5%, aligning with the Budget outlay but not offering significant incremental gains.
Central tax devolutions and economic growth forecast
An important driver of revenue growth will be the 12-13% growth in central tax devolutions. These devolutions are funds that the Central Government distributes to states from the taxes it collects, and they play a crucial role in supplementing state revenues, especially for states with limited tax-raising capacity. This inflow is expected to be a significant financial booster for state governments, aiding them in meeting their developmental and welfare commitments.
CRISIL Ratings based its analysis on an expected 6.8% real GDP growth for the country during this financial year, a figure that suggests a reasonably strong economic environment, even amid global uncertainties and inflationary pressures. As the economy expands, the overall tax base is expected to grow, offering states greater potential to generate their own revenues.
More Read
Challenges and the need for improved collection efficiency
Although the revenue outlook is positive, the report also highlights that states need to take additional measures to ensure sustainable revenue growth. Specifically, states must focus on expanding their own revenue sources—such as property taxes, road taxes, and stamp duties—to reduce reliance on central devolutions and GST collections.
Further, the efficiency of tax collections must be improved. States will need to invest in upgrading their administrative mechanisms to prevent tax evasion and ensure that taxes are collected effectively. Given the rising cost of governance and the need for investment in infrastructure, healthcare, and education, improving collection efficiency will be key to long-term fiscal sustainability.
The 8-10% expected growth in the revenues of India’s top 18 states in the current financial year is a positive sign of economic resilience, supported by strong GST collections and central tax devolutions. While challenges remain, particularly around improving own-source revenues and enhancing tax collection efficiency, the states are poised for healthy revenue growth amid an expanding economy. However, the report emphasizes the need for state governments to continue working on broadening their revenue base and ensuring more effective financial management to meet the rising demands of development and welfare expenditure.
As India’s economy moves forward, the top states will play a critical role in driving overall economic growth and fiscal stability across the country.
