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Revenue growth of India's 18 largest states, which account for over 90 per cent of the gross state domestic product (GDP), is likely to reach Rs 40 lakh crore in the current fiscal at a modest 7-9 per cent, according to a Crisil Ratings report. The credit rating agency said that although these figures will be slightly higher than the growth rate of 6.6 percent in the previous fiscal, but this is less than the decadal growth rate of about 10 percent.
This modest growth will be supported by expected stable GST (goods and services tax) collections and transfers from the Centre, while grants are expected to improve during FY26, after a decline in the previous fiscal.
States have two sources of revenue - the states own revenue (SOR) and transfers received from the Centre. SOR mainly consists of the state's own tax revenue (SOTR), which mainly consists of GST as well as liquor and petroleum taxes. Transfers received from the Centre include tax transfers and grants.
SOTR is expected to grow by 8 per cent this fiscal, driven by GST and liquor tax, with a marginal increase from the 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 said revenue from liquor sales is expected to grow steadily at 9-10 per cent year-on-year, as against a similar growth of 9.6 per cent in the previous fiscal. This will be due to two reasons: 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 increase marginally by 2 per cent this fiscal, same as the previous fiscal. The report said this increase will mainly come from fuel consumption, as there has been no change in the tax structure.
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 the Centre saw a 10 per cent annual decline due to a reduction in transfers to the CSS amid low capital expenditure activity.
With the inputs of ANI
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