Overview of Revenue Growth in Indian States

• A recent Crisil report projects a revenue growth rate of 7-9% for India’s 18 largest states in 2025-26, up from 6.6% in 2024-25. 
• These states account for over 90% of the country's gross state domestic product (GSDP).
• Driven by stable GST collection, strong growth in liquor excise, and improved central transfers.
• Petroleum tax collection remains weak with only a 2% growth.

Structural Issues in State Finances

• Despite the positive outlook, revenue growth is below the decadal average of 10%.
• States rely heavily on central transfers, which accounted for 23-30% of state revenues from 2015-16 to 2024-25.
• Central grants made up 65-70% of non-tax revenue in the last decade.

Debt-to-GDP Ratio and Fiscal Prudence

• The aggregate debt-to-GDP ratio of states stands at 28.5%, exceeding the 20% limit set by the Fiscal Responsibility and Budget Management Review Committee.
• States generally performed better than the Centre, showing fiscal prudence with fiscal deficits around 3% of GSDP.
• The consolidated gross fiscal deficit of states reduced from 4.3% of GDP (1998-99 to 2003-04) to 2.7% of GDP (2004-05 to 2023-24).

Recommendations for Strengthening Finances

• There is a critical need for reforms, particularly in GST compliance and expanding digital revenue tracking.
• States need to address leakages in property tax and user charges.
• The Centre should ensure timely, predictable transfers, especially Finance Commission-recommended grants.
• There is friction over the Center's use of cesses and surcharges, which are not shared with states and may distort fiscal balance.