OPINION I The Economic Times

In our earlier analyses of state finances (refer our earlier two pieces in ET; December 3, 2025 and January 15, 2026; as you find appropriate), drawing on the Comptroller and Auditor General of India reports over the past decade, we highlighted a troubling shift. India’s most populous states, accounting for nearly three fourths of the population, were gradually losing fiscal ground. Their share in total state revenues declined, even as their dependence on central transfers deepened.

The latest CAG Report on State Finances for 2023–24 adds an important new layer to that story.

For the first time, it allows a clearer comparison of state revenues before and after the implementation of GST. What emerges is not a simple narrative of strong versus weak states, but a more nuanced divide: between states that are adapting effectively to the post-GST fiscal architecture and those that are not.

At the aggregate level, the picture appears modest. In real terms, the combined revenue of states grew by just about 2% in 2023–24, hardly reassuring for governments facing rising demands on welfare, infrastructure, and public services. But headline numbers obscure what matters most: divergence.

Some states, including Bihar, Gujarat, Madhya Pradesh and Uttar Pradesh, recorded real revenue growth of 6% or more. Others, such as Karnataka, Rajasthan and West Bengal, saw real declines. Even Maharashtra, the country’s most economically advanced state, posted near stagnant growth.

This widening gap is not incidental. It reflects differences in how states are building, or failing to build, their own revenue capacity.

For years, a key concern around the Goods and Services Tax (GST) was that it would centralise fiscal power and weaken states’ autonomy. That concern was understandable in the uncertain early years of the reform. But the medium-term evidence now points to a more balanced conclusion: GST has, in fact, strengthened states’ own tax performance. The gains, however, have been uneven.

The numbers are instructive. In 2018–19, the first year reflecting the full impact of GST, State GST (SGST) accounted for about 41% of states’ own tax revenue (SOTR). By 2023–24, this had risen to 43%. More significantly, the average annual growth in SOTR increased from around 9.5% in the pre-GST period to 11.7% in the years since. SGST itself grew at an average annual rate of about 13%.

These trends suggest that GST has made state tax revenues more buoyant. Improvements in compliance systems, invoice matching, and formalisation of economic activity have expanded the effective tax base. In that sense, GST has delivered more than many critics anticipated.

But this is only part of the story.

GST has helped states, but it has not compensated for weak fiscal management.

The new data makes it clear that states can still underperform even when GST collections remain robust. That is because fiscal strength depends on more than SGST. It also hinges on non-tax revenues, asset monetisation, returns from public sector enterprises, and the overall balance between self-generated resources and transfers from the Centre.

Karnataka illustrates this complexity. It remains one of the most fiscally self-reliant states, with own tax revenue contributing around 70% of total revenue, well above the national average of roughly 50%. Yet it recorded a real decline in total revenue in 2023–24. A strong tax base was not enough to offset weakening non-tax revenues and reduced asset monetisation.

The situation is more concerning in Rajasthan and West Bengal. Both states combine relatively weak own tax shares with declining non tax revenues and higher dependence on central transfers, a fiscally fragile mix.

A closer look at the states with declining revenues reveals a common pattern with a fall in the share of non-tax revenue (SNTR). This component, which includes dividends from state public enterprises, royalties from natural resources, user charges, and income from land and forests, reflects a state’s ability to monetise assets and enforce pricing discipline. Persistent weakness here signals a structural problem rather than a cyclical one.

The composition of tax revenues also offers important insights. West Bengal, for instance, derives a relatively large share of its own tax revenue, about 45%, from SGST. Karnataka and Rajasthan show similar patterns, though to a slightly lesser extent. While a higher SGST share can indicate strong domestic economic activity, in West Bengal’s case it coexists with a weak overall tax base. This points to deeper issues in translating economic activity into sustained fiscal strength.

In contrast, Uttar Pradesh presents a noteworthy shift. Traditionally seen as fiscally constrained, it emerged as one of the stronger performers in 2023–24. Its revenue growth appears to be supported not just by GST but also by other own taxes and excise. This diversification is critical. States that rely on a broader revenue base are better equipped to manage shocks.

The broader lesson is becoming increasingly clear. GST has worked better for states than many had expected. The rise in SGST’s share, the acceleration in SOTR growth, and the sustained expansion of GST collections all point to improved tax buoyancy.

But GST is not a substitute for sound revenue strategy.

States that strengthen non-tax revenues, monetise public assets effectively, maintain a competitive business environment, and reduce excessive reliance on central transfers will enhance their fiscal autonomy. Those that do not will continue to drift toward greater dependence, regardless of how well GST performs.

That is the real fiscal divide in India today. GST has created an opportunity. Some states are leveraging it. Others are merely subsisting on it.