State revenues set to top pre-pandemic heights: CRISIL Ratings

The recovery would be driven by higher tax buoyancy, rise in sales tax collections from petroleum products (such as petrol and diesel) coupled with an increase in grants as per the recommendations of the Fifteenth Finance Commission.

Jun 25, 2021 08:06 IST India Infoline News Service

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. The recovery would be driven by higher tax buoyancy, a rise in sales tax collections from petroleum products (such as petrol and diesel) coupled with an 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 Rs0.93 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 July, 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 Rs10-13 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% (Rs1.5-1.8/ 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.

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 ~9% last fiscal, should recover to pre-pandemic levels with a growth of 9-10% this fiscal, in line with the Union budget.

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.

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.”

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.

Source: CRISIL Ratings

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