State Revenue Dependency Trends

January 16, 2025

In recent years, Indian States have increasingly relied on financial transfers and grants from the Central government. Over the last decade, the share of Central transfers in State revenues has increased, raising concerns about the sustainability of State finances and their ability to generate independent revenue.

Rise in Central Transfers

From FY16 to FY25, Central transfers accounted for 23-30% of State revenues. This is an increase from 20-24% in the 2000s and early 2010s.

Decline in Own Tax Revenue

States’ own tax revenue has remained below 50% of total revenue for over a decade. This contrasts with the 2000s when it often exceeded this threshold.

Non-Tax Revenue Trends

Non-tax revenue from States is projected to fall below 24% in FY25, marking a 25-year low. This includes grants, service earnings, and interest receipts.

SGST’s Impact

State Goods and Services Tax (SGST) has grown from 15% of total revenue in FY18 to about 22%. Without SGST, own tax revenue has decreased from 34% to 28%.

Central Grants Dominance

Approximately 65-70% of non-tax revenue comes from Central grants, up from 55-65% in previous decades. This marks the increasing reliance on Central support.

Challenges in Tax Collection

Many States struggle to efficiently collect taxes. Efforts to enhance tax mobilisation through stamp duty and vehicle taxes have been sporadic and often inadequate.

Variations Among States

The ratio of own tax revenue to Gross State Domestic Product (GSDP) has declined in several States, including Tamil Nadu and Kerala, while remaining stagnant in others.