A quiet but important shift is underway in India's fiscal landscape, and it's putting state finances back in the spotlight. In a federal system like India's, a state's Own Tax Revenue (OTR) is essentially its report card on financial independence. The more a state earns on its own, the less it needs to lean on central grants, and the more freedom it has to fund its own priorities.
On paper, states have been moving in the right direction. According to the CAG's "State Finances 2024-25" report, the share of OTR in states' total revenue receipts climbed from 45.16 per cent in FY17 to 50.13 per cent in FY25. That's a meaningful, steady climb, especially post-pandemic.
But the real story isn't in that headline number, it's in the pace of growth behind it. States' OTR growth has actually been slowing down for three straight years: 19.81 per cent in FY23, down to 10.66 per cent in FY24, and further down to just 8.05 per cent in FY25.
That slowdown becomes even clearer when you look at tax buoyancy, which measures how much tax revenue grows relative to the growth of a state's overall economy (GSDP). A buoyancy above 1 means tax collections are outpacing economic growth; below 1 means they're falling behind. States' tax buoyancy has slid from a healthy 1.43 in FY23 to 0.92 in FY24, and now down to just 0.67 in FY25, meaning collections are no longer keeping pace with how fast state economies are actually growing.
In simple terms, states are earning a bigger share of their own revenue, but that revenue itself isn't growing as fast as it used to relative to the broader economy. That's a subtle but important distinction, and one that could shape how much bargaining power states have in conversations around central devolution and grants going forward.