States May Face Rs 5-6 lakh Crore Revenue Shortfall In FY27

Chennai: With the West Asia crisis and El Niño, this year, revenue receipts of states may shrink to the range of 88 to 90 per cent of the budget estimate and the shortfall in revenue of 18 states could be in the range of ₹5 to 6 lakh crore. The fiscal deficit also may move up to 3.1 to 3.3 per cent of the GSDP, finds Aditi Nayar, Chief Economist of ICRA.

ICRA, which studied the revenue position of 18 major states excluding the North-Eastern states, Goa and Jharkhand, has found that many states may struggle to achieve the ambitious revenue targets set in their FY27 budgets. According to Nayar, revenue receipts are likely to be only 88-90 per cent of the budget estimates, implying a shortfall of ₹5-6 lakh crore. A significant portion of this gap is expected to arise from an overestimation of grants from the Centre.

The report points out that states have budgeted for a sharp increase in their own tax revenues in FY27. As a group, the states have projected a growth of around 22 per cent in state own tax revenues over the provisional actuals of FY26. However, with nominal GDP growth expected at around 12 per cent and historical growth in state tax revenues averaging only 7-8 per cent in recent years, these assumptions appear overly optimistic.

The West Asia conflict and the possibility of an El Niño event could further strain revenue collections. Higher fuel prices may reduce household disposable incomes and affect consumption, thereby impacting State GST collections. Property-related revenues such as stamp duty and registration fees could also come under pressure in certain markets due to slower remittance flows and stress in employment-intensive sectors such as information technology.

While tax devolution from the Centre is expected to remain broadly stable under the Finance Commission formula, weaker-than-expected central tax collections may lead to a mild shortfall in transfers to states. Changes in excise and customs duties, coupled with the potential impact of higher crude oil prices on corporate profitability, could weigh on the Centre's shareable tax pool.

Another area of concern is grants from the Centre. States have budgeted for an increase of nearly 78 per cent in grants during FY27. However, ICRA estimates that only about 60-65 per cent of the budgeted grant receipts may actually materialise. Nayar noted that overestimation of grants has become a recurring trend among states, often resulting in a mismatch between budgeted and actual receipts as well as expenditure.

The revenue shortfall is expected to have implications for state spending. Since states operate within borrowing limits linked to fiscal deficit targets, lower revenues would inevitably require expenditure adjustments. Given that salaries, pensions, interest payments and several subsidies are difficult to curtail, capital expenditure and discretionary spending programmes could come under pressure.

As a result, fiscal deficits are likely to be higher than budgeted. While states had projected an improvement in fiscal balances, ICRA estimates that the combined fiscal deficit of the 18 states could rise to 3.1-3.3 per cent of GSDP, compared to the budgeted levels. In absolute terms, the fiscal deficit could exceed budget estimates by ₹30,000 crore to ₹1.1 lakh crore.

However, Nayar clarified that this does not necessarily imply a breach of borrowing limits. States remain bound by the borrowing ceiling of 3 per cent of GSDP, along with additional borrowing permitted under the Centre's 50-year interest-free capex loan scheme. Instead, governments may have to recalibrate expenditure plans to remain within these limits.

With uncertainty surrounding geopolitical developments, fuel prices and monsoon conditions, Nayar said the next few months will be critical. State governments will need to closely monitor revenue trends and carefully balance expenditure priorities without undermining growth or household incomes.