India’s top 18 states are expected to post a revenue growth of 8-10 per cent this fiscal to approximately Rs 38 lakh crore, said a report by CRISIL Ratings. Last year, the growth was recorded at 7.5 per cent. The revenue of top 18 states, per CRISIL, accounts for 90 per cent of India’s gross state domestic product. The growth will be primarily driven by healthy Goods & Service Tax (GST) collections and devolution from the Centre, which together comprise around 50 per cent of aggregate state revenues.
While revenue from tax on liquor sales, which is 10 per cent of total revenue, will remain stable, mid-single-digit growth in sales tax collections from petroleum products, which accounts for 7-8 per cent of total revenue, and grants recommended by the Fifteenth Finance Commission (accounting 10-11 per cent of total revenue) will be modest.
“The biggest impetus to revenue growth will continue to come from aggregate state GST collections that, after growing ~18 per cent on-year last fiscal, will climb up another 13-14 per cent in the current fiscal. This will be driven by the resilience of the Indian economy to global turbulence, improving tax compliance, and the shift in economic activity from unorganised to the organised sectors, leading to greater formalisation of the economy,” said Anuj Sethi, Senior Director, CRISIL Ratings.
Central tax devolutions, expected to grow by approximately 12-13 per cent this fiscal will be the second important driver, CRISIL said. While the proportion of the devolution is determined by the Finance Commission, the overall kitty is linked to gross tax collections by the Centre. This pool, which expanded by approximately 19 per cent on-year last fiscal, should grow at a healthy pace this fiscal as well, supported by rising income tax and GST collections, it added.
Further, per analysis by CRISIL, tax garnered from liquor sales is expected to grow 5-7 per cent, primarily due to rising consumption. A majority of the 18 states analysed, barring Karnataka and Kerala, have kept their liquor tax structure unchanged.
“Revenue from sales tax on petroleum products will grow a modest 3-4 per cent on-year this fiscal after a flattish last fiscal. This will stem from higher fuel consumption driven by vehicular and industrial activity, even as the tax structure remains largely unchanged. While consumption is expected to grow ~5-6 per cent, cuts in the prices of petrol and diesel undertaken this March will impact growth in sales tax collections by ~200 bps,” said Aditya Jhaver, Director, CRISIL Ratings.
Grants from Centre will grow by 4-5 per cent on-year, in line with the Union Budget outlay, including for centrally sponsored schemes and Finance Commission grants which comprises grants towards post-devolution revenue deficits based on the budget calculations and the commission’s own stipulations. The calculations assume a real GDP growth forecast of 6.8 per cent for this fiscal.
However, CRISIL added that volatility in the global economy and its impact on economic activity can alter the revenue projections. On the other hand, better-than-expected tax buoyancy, or support from the Centre in the form of higher grants will augment the revenue of states. In order to ensure sustainable growth in revenue, CRISIL said, states will have to focus on expanding its own revenues and improving collection efficiencies.