Previous Year Question
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?
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Correct Answer: D
Detailed Solution
The decisive expression in the question is “steadily increased.” An increase during some years is insufficient; the ratio must rise continuously without an intervening decline.
Statement 1 is incorrect
The Tax-to-GDP ratio measures tax revenue as a percentage of Nominal GDP:
India’s Gross Tax Revenue-to-GDP ratio did not rise continuously during the relevant decade. It fluctuated with economic growth, tax collections, tax buoyancy, tax-rate changes and economic shocks.
For example, the Centre’s Gross Tax Revenue-to-GDP ratio:
Was approximately 11.9% in 2007-08.
Declined to approximately 9.6% in 2009-10 following the Global Financial Crisis and tax concessions.
Recovered subsequently, but did not increase in every successive year.
Therefore, the claim of a steady increase is incorrect.
Statement 2 is incorrect
Fiscal Deficit represents the gap between total expenditure and the Government’s non-debt receipts:
Fiscal Deficit = Total Expenditure - Revenue Receipts - Non-debt Capital Receipts
India’s Fiscal Deficit-to-GDP ratio also did not increase continuously:
It was approximately 2.5% in 2007-08.
It increased to approximately 6.5% in 2009-10 because of crisis-related stimulus expenditure and weaker revenues.
Following fiscal consolidation, it declined to approximately 3.9% in 2015-16 and was budgeted at approximately 3.5% in 2016-17.
Thus, the Fiscal Deficit first increased sharply and subsequently declined. It did not steadily increase throughout the decade.