New Delhi: Indian states are projected to experience a decline in revenue growth for the financial year 2025-26 (FY26) when compared to FY25, primarily due to a slowdown in non-tax revenue.
This insight was provided in a recent report by ICICI Bank, which examined the budget documents of 15 states that collectively account for approximately 90 percent of India's GDP.
The report indicated that "States have forecasted lower revenue growth in FY26 compared to FY25 (13% versus 16%) due to diminished growth in 'Own Tax Revenue' and 'Transfers from the Center.'"
It is estimated that the total receipts for these states will increase by 12 percent year-on-year (YoY) in FY26, reaching Rs 59 trillion. In contrast, the growth rate for total receipts in FY25 is projected at 16 percent.
Revenue receipts, which represent nearly three-quarters of total receipts, are anticipated to grow by 13 percent YoY to Rs 43 trillion in FY26, a decrease from the 16 percent growth expected in FY25.
The anticipated slowdown in revenue growth is largely attributed to weaker performance in non-tax revenue and central transfers.
Non-tax revenue is expected to rise by only 12 percent in FY26, a significant drop from the 23 percent growth seen in FY25. Likewise, transfers from the central government are projected to increase by just 10 percent, down from 18 percent in the previous year.
States' Own Tax Revenue (SOTR) is expected to remain stable, with a growth of 14 percent in FY26, reaching Rs 23 trillion, consistent with the growth rate observed in FY25.
In contrast, the central government's Net Tax Revenue is projected to increase by 11 percent compared to the Revised Estimates for FY25, reaching Rs 29 trillion.
The report also assessed the actual revenue collections for FY25 up to this point. From April to February, states achieved 75 percent of their revenue goal of Rs 38 trillion for FY25. However, there is a concern that states might fall short of their annual revenue targets, particularly due to the underperformance in non-tax revenue. Currently, non-tax revenue is at Rs 2 trillion, while the target is Rs 3.6 trillion.
In summary, although tax revenues remain consistent, the decline in other revenue sources could impact the fiscal health of the states in FY26.
