New Delhi: India is expected to achieve its fiscal deficit goal of 4.4 percent of GDP in FY26, despite projected revenue losses due to the rollout of GST 2.0, as stated in a report by CareEdge Ratings.
The report indicated that although the rationalization of GST is likely to lead to a revenue shortfall, the government's fiscal consolidation strategy remains on track. CareEdge anticipates that the fiscal deficit for FY26 will be maintained at the planned level of 4.4 percent of GDP.
According to the report, the rationalization of GST is projected to create a net revenue shortfall of approximately 0.1 percent of GDP for the current fiscal year.
Nevertheless, the report emphasized that this shortfall is expected to be mitigated by increased dividend transfers from the Reserve Bank of India (RBI). The additional inflow from the central bank is anticipated to provide essential support to government finances during a period when tax collections are under pressure.
It stated, "We expect the net revenue shortfall from GST rationalization....... to be cushioned by the higher RBI dividend transfer."
The report highlighted that the increased RBI dividend transfers and the government's emphasis on managing expenditures will be crucial in keeping the deficit within the budgeted parameters.
Furthermore, the report noted that while GST rationalization may lead to reduced collections in the short term, it is expected to enhance the buoyancy of tax revenues in the medium to long term.
It warned that lower nominal GDP growth this year could present challenges for tax collections. If revenue pressures continue, government spending may face constraints in the latter half of FY26, as authorities remain dedicated to the fiscal consolidation strategy.
While direct tax collections have fallen short of expectations thus far, indirect tax collections have shown stronger performance.
The report indicated that the growth in GST revenues and union excise duties has bolstered overall indirect tax inflows, partially offsetting the decline observed in direct taxes.
In summary, the report asserted that even with revenue challenges stemming from GST rationalisation and slower-than-anticipated growth in tax collection, the fiscal deficit goal of 4.4 percent of GDP for FY26 is attainable.
