Rating agency ICRA expects the tax devolution in FY25 to be in line with the amount indicated by the government in the Union Budget published in July 2024.
The 13 sample states, which accounted for 82 percent of India’s GDP in FY23, are likely to see a mild dip in Finance Commission-recommended grants and other funding, ICRA said. This is expected to offset any increases in grants related to various Central government schemes.
ICRA’s sample includes Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal.
According to ICRA, while the total revenue of these states is estimated to rise by 10 percent in FY25, this falls below the optimistic 18 percent revenue growth indicated in the Budget Estimates (BE). "This may warrant some recalibration of revenue expenditure," said Aditi Nayar, chief economist and head of research & outreach at ICRA.
ICRA expects the state GST, excise duty, and tax collections to grow by 11-13 percent in FY25. However, sales tax collections are forecasted to rise by a modest 5.5 percent.
Capex loan to states
The Centre has increased the allocation for the scheme for special assistance to states for capital investments to Rs 1.5 trillion in July 2024, up from Rs 1.1 trillion last fiscal. However, rating agency expects only 75-80 percent of this amount to be utilised by the states in FY25.
This comes amid a slow uptake of capex loans in the initial months of the fiscal year, which could hinder the full disbursement of funds. Despite this, the boost in resource availability could assist states in expanding their capital spending.
State debt levels on the rise
ICRA estimates that the combined debt stock of these states will reach 25.6 percent of their gross state domestic product (GSDP) in FY25, up from 24.8 percent in FY24.
States such as Gujarat, Maharashtra, and Karnataka are expected to have debt levels below 20 percent of GSDP, while Punjab’s debt is projected to exceed 40 percent. Haryana, MP, Tamil Nadu, Telangana, UP have debt between 20-30 percent of GSDP while Andhra Pradesh, Kerala, West Bengal, Rajasthan have debt between 30-40 percent of GSDP.
A notable concern is the rise in guarantees extended by several states in recent years, contributing to an increase in leverage. ICRA expects the combined leverage (debt plus guarantees) level to inch up to 30 percent of GSDP in FY25, from 29.2 percent in FY24. This trend varies across states, with Gujarat and Karnataka faring better in terms of fiscal space.
States' capex under focus
The capital spending of these 13 states is projected to expand by 13 percent to Rs 6.5 trillion, trailing the FY25 BE target of Rs 7.2 trillion. Capex had a sluggish start in the first four months of FY2025, with a 13.5 percent contraction, but is expected to surge in the second half of the fiscal year. "ICRA forecasts a double-digit 12.6 percent expansion in the combined capex of sample states in FY2025, lower than the 24 percent growth embedded in the BE," Nayar noted.
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