RBI report: States’ fiscal outlook remains positive for FY25

States have kept revenue expenditure growth to 15% during April-October, below the full-year estimate of 19.2%.

Indian States’ fiscal outlook remains favourable in the current fiscal year on account of resilient domestic economic activity, which is expected to support revenue buoyancy, according to an Reserve Bank of India (RBI) report. The report pointed out that States have contained the growth in revenue expenditures to 15 per cent during April-October, below the full-year budget estimate of 19.2 per cent.

In FY24, provisional accounts (PA) indicated that States’ revenue receipts moderated by 0.30 percentage points to 13.3 per cent of GDP, primarily due to a sharp dip in grants-in-aid from the Centre. Tax collections improved due to an increase in both own tax revenue and tax transfers from the Centre. Within States’ own tax revenues, SGST registered robust growth, supported by higher economic activity and improved compliance.

States with a history of a low tax-GSDP ratios have witnessed considerable improvement in revenue mobilisation since the implementation of GST, leading to a reduction in inter-State disparities in tax collection. Sales tax collections, meanwhile, remained muted.

 “In 2024-25, the States have budgeted an increase in revenue receipts by 1 percentage point to 14.3 per cent of GDP, driven by both tax and non-tax sources. In the Union Budget, the devolution of States’ share in taxes is projected to grow by 10.4 per cent in 2024-25 (BE) over 2023-24 (PA),” the report said.

“Within States’ own tax revenue, all major taxes – SGST, excise duties, and sales tax – are expected to increase. These key taxes account for over 75 per cent of total own tax revenue,” it

States are undertaking various initiatives to boost revenue collection, streamline compliance, and enhance transparency. Gujarat has established GST Seva Kendras to simplify registration and prevent documentation misuse, while Haryana plans to create facilitation cells to assist startups and MSMEs with GST compliance.

Further, the July 25, 2024 verdict given by the Supreme Court which granted States the authority to impose taxes on minerals and land containing minerals as well as to claim royalty payments retrospectively from April 1, 2005, will significantly benefit mineral-rich States such as Andhra Pradesh, Chhattisgarh, Jharkhand, Karnataka, Odisha, Madhya Pradesh, Maharashtra, Tamil Nadu, and Telangana.

On the expenditure side, States have contained the growth in revenue expenditures to 15 per cent during H1FY25, below the full-year budget estimate of 19.2 per cent. However, the capital outlay of the States is expected to gain pace in the second half of the year, aided by the Centre’s 50-year interest-free loans The report said while the implementation of fiscal responsibility legislations (FRLs) has led to significant consolidation of debt and deficit indicators of states in the last two decades, there is scope for further improvement and refinement. These include making some space for counter-cyclical fiscal policy measures in order to provide flexibility in the face of large exogenous shocks. Second, for better expenditure planning, the states could adopt a Medium-Term Expenditure Framework (MTEF) which links policymaking to budgeting by ensuring forward planning for fund availability and improving accountability. Enhancing the enforcement mechanism, assessing potential fiscal risks arising out of macroeconomic uncertainties, and comprehensive information on state governments’ policies and actions could further boost states’ fiscal health. However, the weak financial health of the state-owned electricity distribution companies remains a stress point for state government finances.