New Delhi [India], July 29 : Revenue growth of India's 18 largest states, which account for over 90 per cent of the gross state domestic product, is likely to witness a marginal uptick at 7-9 per cent on-year this fiscal to Rs 40 lakh crore, according to a report by Crisil Ratings.
The credit rating agency stated that these figures, however, will be slightly higher than the 6.6 per cent notched up last fiscal, though lower than the decadal growth of about 10 per cent.
The marginal uptick will be supported by expectation of steady GST (Goods and Services Tax) collections and devolutions from Centre, while grants are expected to witness recovery during fiscal 2026, after a fall last fiscal.
States have two revenue streams - the states own revenue (SOR) and transfers from the Centre. SOR primarily includes the state's own tax revenue (SOTR), which primarily consists of GST as well as liquor and petroleum tax. Transfers from the Centre include tax devolutions and grants.
SOTR is expected to grow 8 per cent this fiscal, driven by GST and liquor tax, with a modest growth from petroleum tax.
Commenting on the observation, Anuj Sethi, Senior Director, Crisil Ratings, said, "GST collections remain the driver for states' own taxes, with one year growth projected at 9-10 per cent for this fiscal, marginally lower than the last. The GST collections should sustain considering an expected nominal GDP growth of 9 per cent."
"While better tax compliance and continuing shift in economic activity from the unorganised to the organised sectors are expected to support GST revenue, subdued domestic consumption and inflation can be dampeners and pose a downside risk to that expectation," Sethi added.
The rating firm stated that the revenue from liquor sales is likely to grow a stable 9-10 per cent on-year, following a similar growth of 9.6 per cent last fiscal. This will be driven by two factors: rising consumption leading to a volume growth of 5-6 per cent and states levying higher excise duty.
Revenue from sales tax on petroleum products will grow a modest 2 per cent on-year this fiscal, similar to last fiscal. The growth will stem primarily from fuel consumption, as the tax structure remains largely unchanged, the report added.
Aditya Jhaver, Director, Crisil Ratings, said, "While growth in states' own taxes will remain moderate, their revenues will continue to benefit from tax devolutions from the central government, which are expected to rise 11-12 per cent this fiscal after a strong growth of nearly 14 per cent last fiscal. Rising gross tax collections, supported by growth in income tax and GST collections, remain a key driver."
On the other hand, grants from the Centre are expected to recover and grow by 3-4 per cent due to higher outlay towards centrally sponsored schemes (CSS) and Finance Commission grants to urban and rural local bodies, as also evidenced from the budget estimates of central and state governments for fiscal 2026.
Last fiscal, grants from centre witnessed a 10 per cent on-year decline on account of moderation in the transfers for CSS amid lower capital expenditure activity.