State Revenues Set To Top Pre-pandemic Heights: CRISIL

Revenues of India's top 10 states, which plunged 600 basis points (bps) last fiscal, are set to exceed the pre-pandemic - or fiscal 2020 - levels by 600 bps this fiscal, CRISIL has stated. The recovery would be driven by higher tax buoyancy, rise in sales tax collections from petroleum products (such as petrol and diesel) coupled with increase in grants as per the recommendations of the Fifteenth Finance Commission.

A CRISIL Ratings study of 10 states that account for 70% of aggregate gross state domestic product indicates as much.

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 this fiscal, with April and May collections averaging Rs 0.93 lakh crore, marking an 11% growth over fiscal 2020.

Says Manish Gupta, Senior Director, CRISIL Ratings, "While the second wave of the pandemic may moderate GST collections in June and July2, 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 pre-pandemic levels."

Another factor that will provide a fillip to state revenues is sales tax. The price of crude oil has risen to ~$70 per barrel versus $60 on average in fiscal 2020, leading to higher fuel (petrol and diesel) prices.

That, combined with the Rs 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% (Rs 1.5-1.8 per litre) last fiscal. Consequently, we expect sales tax revenue for states to increase ~30% this fiscal from fiscal 20 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.

Says Aditya Jhaver, Director, CRISIL Ratings, "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 pencilled in way higher tax buoyancy."