The Union Budget for 2023-24 pegged India’s nominal GDP to grow at 11 per cent in the fiscal year 2023-24. Despite robust tax revenues led by strong GST collections in the previous fiscal, the Centre was also more “realistic” with its tax revenue estimates. It projected a modest 10 per cent growth in gross tax revenue collections for FY24 considering the cooling off of inflation and higher base.
On the other hand, many States seem to be optimistic about their economic growth prospects and tax revenue collections. businessline analysed the FY24 budget of some of the large States. While Uttar Pradesh projected its nominal gross state domestic product (GSDP) to grow at 19 per cent in FY24, Tamil Nadu sees its economy growing by 14 per cent in the current fiscal.
The assumptions are way higher than their actual GSDP growth in the past. India Ratings & Research said Uttar Pradesh’s nominal GSDP growth budgeted for FY24 appears to be “over-optimistic”, given the likely receding of inflation in FY24. The average nominal GSDP growth of the UP was around 11 per cent during FY16-FY20, per NSO data. Similarly, the average GSDP growth of Tamil Nadu during FY16-FY22 stood only at 9.9 per cent.
States like Gujarat, Telangana, Odisha, and Rajasthan have all estimated their nominal GSDP to grow at a rate higher than the national average.
“States tend to overstate the GDP growth projections at times,” says Madan Sabnavis, Chief Economist, Bank of Baroda. He added that it gives them space to budget for a higher fiscal deficit in value terms. “If they target a deficit (fiscal) of say 3.5 per cent, they get room for a larger number when planning their outlays.”
Paras Jasrai, Senior Analyst, India Ratings & Research (Ind-Ra), said the nominal GSDP growth projections of the mentioned states for FY24 appear to be on the higher side given the expected decline of inflation.
Optimistic revenue targets
Riding on robust growth in tax collections in the previous year, some States have also set ambitious growth targets for revenue collection for the current fiscal. Uttar Pradesh has projected State’s own tax revenue (SOTR) of ₹2.49-lakh crore for FY24 — 42 per cent higher than its revised estimates for FY23. Rajasthan, Andhra Pradesh, Tamil Nadu, and Telangana have projected their own tax revenues to grow upwards of 15 per cent. In contrast, the Centre has projected its gross tax revenue to grow by 10 per cent to ₹30.43-lakh crore in the current fiscal.
Sabnavis said the Centre tends to be conservative on both GDP projections as well as revenue while States tend to overstate the same even in the past. “Typically, revenue growth cannot be more than 12-13 per cent as seen in the past. Hence, this will not be possible. States will then end up cutting back on expenditure, which is invariably capex.”
Jasrai says the challenge in meeting such high tax revenue targets would be emanating from the moderation in inflation. “With the WPI & CPI inflation expected to be around 1 per cent and 5.4 per cent, respectively (against 9.4 per cent and 6.7 per cent in FY23), the GDP deflator growth is expected to be in the range of 3-4 per cent in FY24.”
This, Jasrai adds, would likely keep the own-tax revenue buoyancy (the ratio of growth in own-tax revenue to nominal GSDP growth) for the States at around 1.1x in FY24. “Ind-Ra expects the own-tax revenue growth for States to be around 11-12 per cent in FY24,” he adds.