UPSC Prelims 2015 Q4: Indian Economy – Fiscal Policy & Budget
A decrease in tax to GDP ratio of a country indicates which of the following?
1. Slowing economic growth rate
2. Less equitable distribution of national income
Select the correct answer
using the code given below.
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (a) 1 only
Explanation
Decrease in the tax to GDP ratio
Tax to GDP ratio = total tax revenue divided by GDP.
| Statement | Verdict | Reason |
|---|---|---|
| 1. Slowing economic growth rate | Correct | When growth slows, incomes, profits and sales fall, so tax collections fall faster than GDP |
| 2. Less equitable distribution of national income | Incorrect | The ratio says nothing about who earns the income; inequality is measured by the Gini coefficient |
What moves the ratio:
| Factor | Effect on the ratio |
|---|---|
| Slower growth | Falls |
| Tax evasion and a large informal sector | Falls |
| Tax cuts and exemptions | Falls |
| Better compliance (for example GST) | Rises |
A low ratio limits what the Government can spend on welfare and infrastructure.
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. A fall in the ratio points to a slowing economic growth rate.
- (b) Incorrect. The ratio does not measure the distribution of national income.
- (c) Incorrect. Statement 2 is false; equity is not shown by the tax to GDP ratio.
- (d) Incorrect. Statement 1 is true; slower growth lowers tax buoyancy.
Key point
Tax to GDP ratio falls when growth slows or compliance weakens; it does not measure income distribution (the Gini coefficient does).
Remember
Falling tax to GDP ratio = slowing growth.
Common mistakes
- Reading too much into the ratio and linking it to inequality.
- Confusing tax to GDP ratio with tax buoyancy or tax elasticity.
- Forgetting that India's ratio is low compared with developed countries.
Exam tip
One ratio measures one thing. Tax to GDP is about revenue, not about fairness.
Sources
- Ministry of Finance — Economic Survey (Fiscal Developments)
- NCERT Class XII — Introductory Macroeconomics, Ch 5 (Government Budget and the Economy)