States’ Revenue May Raise 7-9% in FY23, says Crisil report

The overall revenue of the top 17 states in India, which accounts for 85-90% of aggregate Gross State Domestic Product (GSDP), is likely to grow by 7-9% this fiscal according to Crisil Ratings. The rating agency, Crisil, stated that the revenue grew 25% last fiscal year over a flattish base of FY21 due to the economic slowdown caused by the pandemic.

The report analysed the finances of large state economies, including Gujarat, Maharashtra, Tamil Nadu, Karnataka, Uttar Pradesh, Rajasthan and Telangana. The GST collections and the devolutions from the Centre, comprising 43-45% of the states’ revenue, are expected to grow 19% and 15% annually, respectively, in FY23.

The report stated that significant impetus to revenue growth comes from the aggregate state GST collections that had already rebounded by 29% last year. Anuj Sethi, senior director at Crisil Ratings, stated that they expect the momentum to sustain and the collections to increase 20% this fiscal, supported by a higher inflationary environment, better compliance levels and steady economic growth.

In addition, there is an expectation that the shares of states in central taxes to grow further. Crisil Ratings stated that the central tax devolution kitty expanded by about 40% last fiscal and would further increase by around 15% this fiscal year.

The overall kitty is linked with the Central Government’s gross tax collections while the Finance Commission determines the proportions. The pool should grow further by 15% this fiscal which expanded 40% in FY22 to Rs.7.34 trillion. 

On the other hand, the report said that fuel collections from sales tax on motor fuel for states are expected to remain range bound for states. That’s because the effects of a better sales volume and an expected 25% on-year rise in crude price in the current fiscal year would be offset by the central excise reduction on diesel and petrol in May 2022 and November 2021, followed by a sales tax rates reduction in some states.

Several grants provided by the Centre, including Finance Commission grants, which are towards centrally sponsored schemes and revenue deficit, are likely to only marginal grow this fiscal, based on the Finance Commission stipulations and budget calculations.

Furthermore, GST compensation payments (7-9% of revenue in the last two fiscals) will also end with the compensation period expiring on 1 July 2022. The rating agency suggested that it would be imperative for them to focus on better processes for higher collection efficiency and various revenue avenues that support future revenue growth.

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