Revenue of India’s top 18 states likely to grow at 8-10% in FY25: Crisil

The revenue of India’s top 18 states, which account for more than 90% of India’s gross state domestic product, is likely to grow at a steady 8-10% to ₹38 trillion during FY25, rating agency Crisil said on Wednesday.

This growth will be supported primarily by healthy Goods & Services Tax (GST) collections and devolution from the union government, which together comprise about 50% of aggregate state revenues, the rating agency said. During April-June 2024 (Q1 FY25), gross GST collection stood at ₹5.57 trillion, up from ₹5.06 trillion a year ago.

Going forward, Crisil expects revenue from the tax on liquor sales, which accounts for 10% of total revenue, to remain stable, and sales tax collections from petroleum products to grow 7-8%. Grants recommended by the Fifteenth Finance Commission (10-11%) are expected to be modest.

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“The biggest impetus to revenue growth will continue to come from aggregate state GST collections which, after growing about 18% on-year last fiscal, will climb another 13-14% in the current fiscal," said Anuj Sethi, senior director, Crisil Ratings.

"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," Sethi added.

Tax devolution an important driver, says Crisil

According to Crisil, tax devolution from the union government, which is expected to grow about 12-13% this fiscal, will be an important driver of growth. While the proportion of the taxes devolved is determined by the Finance Commission, the overall kitty is linked to gross tax collections by the union government.

"This pool, which expanded by about 19% on-year last fiscal, should grow at a healthy pace this fiscal as well, supported by rising income tax and GST collections," the rating agency said. "Tax garnered from liquor sales is expected to grow 5-7%, primarily due to rising consumption. A majority of the 18 states analysed, barring Karnataka and Kerala, have kept their liquor tax structure unchanged," it added.

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Meanwhile, Crisil expects grants from the government to grow by 4-5% on-year, in line with the Union budget outlay, including for centrally sponsored schemes and Finance Commission grants.

It warned, though, that volatility in the global economy and its impact on economic activity could alter revenue projections. However, better-than-expected tax buoyancy, or support from the Centre in the form of higher grants, are likely to augment the revenue of states, it added.

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“Revenue from sales tax on petroleum products will grow a modest 3-4% 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," said Aditya Jhaver, director, Crisil Ratings.

"While consumption is expected to grow about 5-6%, cuts in the prices of petrol and diesel undertaken this March will impact growth in sales tax collections by about 200 basis points," he added.