Revenue, Fiscal Deficit of States to Further Widen With GST Rate Cuts

Chennai: The revenue deficit and fiscal deficit of states have widened in the first four months of the fiscal. With the GST rate cuts expected to reduce the GST collections for the rest of the fiscal, the deficits may further widen.

The combined revenue deficit of the 19 states nearly doubled to Rs 72,700 crore from Rs. 37,100 crore in the same period last year. In the first four months, the revenue deficit has already touched 55 per cent of the Budget Estimate against 17 per cent in the same period last year, as per the provisional actuals (PA) released by the Comptroller and Auditor General of India.

The combined revenue receipts of 19 states increased by 7.7 per cent during Apr-July FY26, which was well below the 22 per cent growth indicated in the FY26 Budget Estimates. The States Own Tax Revenues also rose only by a modest 4.8 per cent during the period against 20.6 per cent in Budget Estimates. This was led by sub-4 per cent growth in state GST collections and sales tax collections against double-digit growth in the Budget Estimates, finds ICRA.

Meanwhile, revenue expenditure expanded by 11 per cent during Apr-July FY26, outpacing the growth of revenue receipts in the same period.

The combined capital outlay and net lending of the 19 states expanded by 9.8 per cent during the period, lower than 30.5 per cent growth in BE, but better than 11.7 per cent contraction in Apr-Jul FY2025. Widening revenue deficit and increase in capex led to the fiscal deficit increasing to Rs. 2.3 lakh crore during Apr-Jul FY26 from Rs. 1.8 lakh crore last year.

To meet the targets indicated in their BE for FY26, revenue receipts and expenditure need to grow by 22- 28 per cent and capex by a higher 35 per cent during Aug-Mar FY26, which appears implausible, finds ICRA.

Looking ahead, the actual SGST collections in FY2026 will be impacted by proposed changes in the GST slab rates. If consumers opt to defer the purchase of discretionary items to avail the benefit of the expected lower tax rates after the GST rate rationalisation, consumption may get compressed to an extent in the immediate term. The timing of these changes, the extent of alteration in consumer behaviour in purchasing goods, and the final rate structure will determine the potential revenue loss, if any, for the states in FY2026 and beyond.