Rise in GST collections and devolutions from Centre major growth drivers
The 18 states that account for ~90% of aggregate gross state domestic product may see steady revenue growth of 6-8% on-year to a cumulative ~Rs 34 lakh crore this fiscal (7.3% in fiscal 2023).
With withdrawal of GST compensation support and muted sales tax collections and grants, growth this year will be predominantly supported by Goods and Services Tax (GST) collections, devolutions from the Centre and taxes and duties on liquor sales, together comprising 55-60% of aggregate state revenues.
Says Anuj Sethi, Senior Director, CRISIL Ratings, "Though growth in aggregate state GST collection will moderate from ~20% on-year last fiscal to 12-14% this fiscal, it will still remain the biggest driver of revenue growth. This will be supported by the resilience of the Indian economy amid global turbulence, moderating inflationary environment, and increasing tax compliance."
Central tax devolutions, expected to grow in double digits too, will be the second main driver. While the proportion is determined by the Finance Commission, the overall kitty is linked with gross tax collections by the Centre. This pool, which expanded ~13% on-year last fiscal1, should grow ~10% this fiscal.
The third revenue driver i.e., collections (excise duty and sales tax) from liquor sales will also grow healthy at 10-12%, led by increasing consumption as most states have kept their tax structure unchanged.
On the other hand, states' revenue from sales tax on motor fuel may increase only by a modest 6-8% on-year driven primarily by steady demand for petroleum products, with only a handful of states having announced revisions in their tax structures for motor fuel in their budgets for fiscal 2024. Also, price of crude is expected to remain rangebound between $80-85 per barrel this fiscal, keeping the per-litre sales tax collections of states similar to last fiscal.
Says Aditya Jhaver, Director, CRISIL Ratings, "Among the other main reasons for the modest revenue growth overall, would be the marginal growth in grants from the Centre. This includes grants towards Centrally Sponsored Schemes and Finance Commission grants including those towards post-devolution revenue deficits, based on the budget calculations and Finance Commission stipulations2. Also, GST compensation grants from the central government, at ~Rs 0.9 lakh crore last fiscal, is no longer available this fiscal as the scheme ended effective June 30, 2022."