Question 3 from UPSC CSE 2017 - Economics

Question

Consider the following statements:
1. Tax revenue as a percent of GDP of India has steadily increased in the last decade.
2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade.
Which of the statements given above is/are correct?

Accepted Answer

Correct Option: D. Neither 1 nor 2

Strategy: Focus on the keyword **'steadily'** in both statements. Economic indicators like tax revenue and fiscal deficit are highly sensitive to business cycles, policy changes, and global events. Over a period as long as a decade, it is extremely rare for such metrics to move in one direction without any fluctuation. This makes both claims of a 'steady increase' highly suspect.

Statement 1 is incorrect as India's tax-to-GDP ratio has fluctuated, not steadily risen. Statement 2 is also incorrect because the government's policy, guided by the FRBM Act, has been to consolidate or reduce the fiscal deficit, though it has spiked during crises. The word 'steadily' invalidates both statements.

Key Info: ## Tax Revenue to GDP Ratio

The Tax-to-GDP ratio is a key indicator of a country's ability to finance its expenditures. It is the total tax revenue collected by the government (central and state) as a percentage of the country's Gross Domestic Product (GDP).

*   **Trend in India** -- Contrary to the statement, India's tax-to-GDP ratio has not increased steadily. It has shown significant fluctuations over the past decade due to economic slowdowns, policy changes like the implementation of Goods and Services Tax (GST) in 2017, and external shocks like the COVID-19 pandemic.
*   **Example of Fluctuation** -- The combined (Centre + States) tax-to-GDP ratio was around 16.6% in FY2007-08, fell after the global financial crisis, and has hovered in the 16-18% range since then, with dips and rises. For instance, it was 17.4% in FY19, fell to 16.3% in FY20, and rose again to 17.7% in FY22. This pattern is not a 'steady increase'.

## Fiscal Deficit to GDP Ratio

Fiscal deficit is the difference between the total expenditure of the government and its total revenue (excluding borrowings). It is expressed as a percentage of GDP to indicate the scale of government borrowing required to finance its spending.

*   **Trend in India** -- The fiscal deficit has also not increased steadily. The government's stated policy, under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, is to achieve fiscal consolidation, i.e., to reduce the fiscal deficit over time.
*   **Example of Fluctuation** -- While the government has often missed FRBM targets, the trend has been volatile, not a steady rise. The deficit was high after the 2008 crisis, then was gradually brought down. It spiked dramatically to 9.2% of GDP in FY 2020-21 due to the pandemic-related stimulus and revenue shortfall. Subsequently, the government has aimed to reduce it, targeting 5.9% for FY 2023-24 and 4.5% by FY 2025-26. This clearly demonstrates a fluctuating trend, not a steady increase.

## Fiscal Responsibility and Budget Management (FRBM) Act, 2003

The FRBM Act is an act of the Parliament of India to institutionalize financial discipline, reduce India's fiscal deficit, and improve macroeconomic management. The main objective is to ensure inter-generational equity in fiscal management and long-term macro-economic stability. It sets targets for the government to reduce fiscal deficits. The existence and objectives of this Act fundamentally contradict the idea of a 'steadily increasing' fiscal deficit as a policy or outcome.

Answer

Option A: 1 only

Answer

Option B: 2 only

Answer

Option C: Both 1 and 2

Consider the following statements: Tax revenue as a percent of GDP of India has steadily increased in the last decade. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade. Which of the statements given above is/are correct?

Consider the following statements:

Tax revenue as a percent of GDP of India has steadily increased in the last decade.

Fiscal deficit as a percent of GDP of India has steadily increased in the last decade.
Which of the statements given above is/are correct?