States' fiscal deficit likely to moderate to 3.4% of GSDP in FY27 as tax collections improve: ICICI Bank

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.

"While last year, receipts were seen to be moderating, this year, with a pick-up in nominal GDP, tax collections should improve, which bodes well for the deficit outlook," the report said.

According to the report, the fiscal deficit had widened to 3.6 per cent of GSDP in FY26 because of muted tax collections and higher expenditure. However, stronger revenue mobilisation in the current 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 year-on-year in SGST collections and an 18 per cent year-on-year increase in stamp duty collections, reflecting sustained consumption activity and resilience in the housing sector.

The report noted that transfers from the Centre rose 36 per cent year-on-year during the period, although it expects this momentum to normalise over the remainder of the fiscal year. It added that non-tax revenue also remained healthy, supported by higher collections from fees, royalties and dividends.

While total expenditure increased 7 per cent year-on-year in the first two months of FY27, capital expenditure remained subdued as states prioritised committed spending such as salaries, pensions, interest payments, subsidies and welfare programmes. The report said this moderation in capital expenditure is likely to be temporary. "As the fiscal year progresses, states are expected to scale up productive capital expenditure, particularly on infrastructure, to support medium-term economic growth and asset creation," it said.

The report said 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. (ANI)