Fiscal deficit may widen marginally due to GST changes: Emkay Report

The government's fiscal deficit is expected to see a short-term increase due to proposed changes in the Goods and Services Tax (GST) structure, according to a report by Emkay Research. The fiscal deficit could rise by 0.1 per cent in FY26E to 4.5 per cent and by 0.2 per cent in FY27E to 4.6 per cent. This increase is anticipated to be temporary, with normalisation expected within two to three years.

The report suggests that the government should absorb the revenue loss, as growth gains are projected to cover the shortfall over time. Factors such as tax buoyancy and asset sales are expected to partially offset the shortfall. The government's fiscal strategy involves maintaining consumer inflation at manageable levels, with estimates suggesting an easing by about 50-60 basis points over the next year.

A significant hurdle in implementing these GST changes lies in garnering consensus among states. The central government holds only a 33 per cent vote in the GST Council, with the remaining 67 per cent shared equally among 31 states and union territories. A 75 per cent weighted majority is necessary, meaning support from at least 20 states is required to pass the changes.

The complexity of India's current GST structure has been described as a "millstone around the growth neck” in the report. Rationalising this structure is viewed as beneficial, although it involves certain risks. The recent ratings upgrade of India indicates strong macro-financial stability, creating a conducive environment for these reforms.

Assuming constant expenditure levels, the Centre's FY26 net fiscal slippage is estimated at around 0.2 per cent of GDP, with reduced tax revenues balanced by higher dividends and public sector unit divestment. The overall impact on aggregate demand will depend on the government's fiscal approach, particularly in areas such as capital expenditure and social sector schemes.

The planned shift to a two-tier GST structure is seen as a positive move, as indirect taxes are considered regressive. While the reforms may cause short-term fiscal pressure, they are expected to foster growth and simplify the tax code in the long run. However, the final announcement may involve changes to rates on individual categories.