Revenues of India’s top 10 states which account for around 70% of aggregate gross state domestic product (GSDP) are set to exceed the pre-pandemic levels of FY20 by around 600 basis points in FY22 driven by higher tax buoyancy, rise in sales tax collections from petroleum products coupled with an increase in grants, as per the recommendations of the Fifteenth Finance Commission.
“There is an interesting dichotomy here. While the overall revenues may grow 600 bps over fiscal 2020, they would still lag the budget estimates of states by a good 17%. That’s because most states didn’t factor in the impact of the second wave and have penciled in way higher tax buoyancy,” said Aditya Jhaver, Director at CRISIL Ratings.
Crisil said these calculations bake in gradual recovery in economic activity and tax collections from July. “A higher than expected intensity of the third wave leading to a re-imposition of stringent lockdown could negatively impact revenue collections and our estimates. Conversely, better-than-expected tax buoyancy will drive revenue growth higher than our estimates,” it added.
Revenues of the 10 states — Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, and Kerala — plunged 600 bps in FY21.
Aggregate Goods and Services Tax (GST) collections, which account for a fifth of the revenues of states, recovered well in the fourth quarter of last fiscal as economic activity sprung back. The momentum continues in the current fiscal, with April and May collections averaging ₹0.93 trillion, marking an 11% growth over fiscal 2020.
“While the second wave of the pandemic may moderate GST collections in June and July 2, we expect a recovery to pre-pandemic levels by August. CRISIL expects India’s GDP to grow 9.5% this fiscal which should assist GST collections to marginally better the prepandemic levels,” said Manish Gupta, Senior Director, CRISIL Ratings.
Another factor that will provide a fillip to state revenues is sales tax. The price of crude oil has risen to around $70 per barrel versus $60 on average in FY20, leading to higher petrol and diesel prices. That, combined with the ₹10-13 per litre increase in central excise imposed last year, will increase the taxable value of fuel for levy of sales tax which accounts for 10% of state revenues.
Most of these 10 states had hiked sales tax on fuel sales by 6-7% ( ₹1.5-1.8 per litre) last fiscal. “Consequently, we expect sales tax revenue for states to increase around 30% this fiscal from FY20 levels, even as fuel volume remains 2- 3% lower than the pre-pandemic levels. The price of crude oil is seen hovering at $70 per barrel on average this fiscal,” the rating agency said.
In addition to own taxes, states also have a share of central taxes, which forms a quarter of their overall revenue. While the proportions are determined by the Finance Commission, the overall kitty is linked with India’s GDP growth. “This kitty, which declined around 9% last fiscal, should recover to pre-pandemic levels with a growth of 9-10% this fiscal, in line with the Union budget,” the rating agency added.
States are also dependent on various grants provided by the central government, including grants towards Centrally Sponsored Schemes, Finance Commission grants, GST compensation, and revenue deficit, among others. “Despite muted economic activity, these grants grew 10% last fiscal on Finance Commission stipulations, and are seen robust this fiscal, too,” Crisil said.
Source from: https://www.livemint.com/economy/revenues-of-top-10-states-set-to-top-pre-pandemic-heights-crisil-11624534973010.html