States' fiscal deficit is expected to moderate to 3.4 per cent of Gross State Domestic Product (GSDP) in FY27. This is aided by stronger tax collections and higher revenue receipts, according to an ICICI Bank report.
The report said the outlook for state finances has improved after a stronger start to the fiscal year, with higher State GST (SGST) collections, stamp duty receipts, and other tax revenues expected to support fiscal consolidation in the coming months. It noted that a pick-up in nominal GDP this year should aid tax collections, unlike last year when receipts were seen moderating.
The fiscal deficit had widened to 3.6 per cent of GSDP in FY26 due to muted tax collections and higher expenditure. Conversely, stronger revenue mobilisation this fiscal is expected to improve the fiscal position. For a sample of 24 states, total receipts rose 7.7 per cent year-on-year during April-May 2026, driven by an 18 per cent year-on-year increase in revenue receipts.
States' own tax revenue grew 16.4 per cent year-on-year, supported by a 22 per cent rise in SGST collections. An 18 per cent increase in stamp duty collections also contributed to the growth.
Central Transfers Rise Sharply, Capex Stays Subdued
The report noted that transfers from the Centre rose 36 per cent year-on-year during the period, though it expects this momentum to normalise over the rest of the fiscal year. Non-tax revenue also remained healthy, supported by higher collections from fees, royalties, and dividends.
While total expenditure rose 7 per cent year-on-year in the first two months of FY27, capital expenditure stayed subdued as states prioritised committed spending such as salaries, pensions, interest payments, subsidies, and welfare programmes.
The report noted that this moderation in capital expenditure is likely to be temporary. States are expected to scale up productive capital spending, particularly on infrastructure, as the fiscal year progresses. This is expected to support medium-term economic growth and asset creation. Healthier revenue inflows and improving fiscal resources are expected to support higher infrastructure spending later in the fiscal year while strengthening the overall fiscal outlook for states. |
