India's States Poised for Revenue Growth Boost Despite Challenges

India's 18 principal states, which contribute over 90% to the gross state domestic product (GSDP), are projected to experience a marginal revenue growth boost of 7-9% this fiscal year, based on a report by Crisil Ratings. This increment, amounting to ₹40 lakh crore, surpasses last year's 6.6% yet falls short of the decadal average of around 10%.

The anticipated growth is largely supported by consistent GST collections along with central government devolutions, while a recovery in grants is expected to manifest in fiscal 2026, following a decline last year. State revenues are dual-faceted, deriving from their own revenue sources (SOR), primarily GST, liquor, and petroleum taxes, and from center transfers through devolutions and grants.

Anuj Sethi, Crisil Ratings' Senior Director, highlighted that GST continues to steer state revenue with a projected growth between 9-10% this fiscal, slightly below the previous year's rate. The sustainability of GST collections is linked to a nominal GDP growth forecast of 9%. Meanwhile, improved tax compliance and economic shifts from informal to formal sectors are expected to bolster GST income, although inflation and domestic consumption pose potential risk factors.

Liquor tax revenue is set to increase consistently by 9-10% this year, thanks to heightened consumption and increased excise duties, according to data from last fiscal's 9.6% growth. Conversely, petroleum sales tax revenue is expected to see a modest 2% rise, mirroring last year's growth driven by steady fuel demand in an unchanged tax environment.

Aditya Jhaver, Director at Crisil Ratings, remarked that while state tax growth shows modest trends, central tax devolutions remain beneficial with a forecast increase of 11-12% following a robust 14% rise last year. The overall tax collection momentum, sustained by growth in income tax and GST, continues to energize revenue forecasts.

Center grants are predicted to recover and grow by 3-4%, owed to increased allocations for centrally sponsored schemes and Finance Commission grants to urban and rural administrations. This comes after a 10% decline last fiscal due to reduced CSS transfers amid lower capital expenditure efforts, aligning with 2026 budget outlines from central and state projections.

(With inputs from agencies.)