Projected Revenue Growth for India's Leading States

According to a recent report by Crisil Ratings, India's 18 largest states are expected to see their revenue growth accelerate to 7-9% in FY26, reaching an impressive Rs 40 lakh crore. This marks a slight increase from the previous year's growth of 6.6%. These states collectively represent over 90% of the country's gross state domestic product (GSDP).

Key Drivers Behind the Growth

The anticipated uptick is largely attributed to steady GST collections, robust tax devolutions from the Centre, and a recovery in grant transfers following a contraction in the previous year. States primarily generate revenue through own revenue sources (SOR), including taxes on GST, liquor, and petroleum, as well as transfers from the Centre.

GST and Liquor Taxes Lead the Charge

GST collections remain a cornerstone for states' own taxes, with projections indicating a 9-10% growth this fiscal year. Similarly, liquor tax revenue is expected to rise by 9-10%, fueled by increased consumption and excise duty hikes in several states.

Challenges and Opportunities Ahead

While petroleum-related tax revenue growth is expected to remain modest at 2%, central transfers, including tax devolutions and grants, are forecasted to grow significantly. This growth is supported by rising gross tax collections and increased allocations for centrally sponsored schemes (CSS).

Last fiscal year saw a 10% decline in grants, primarily due to reduced CSS transfers and subdued capital expenditure by state governments. However, the outlook for FY26 appears more optimistic, with grants expected to recover by 3-4%.