UPSC Prelims 2017 Q94: Indian Economy – Fiscal Policy & Budget
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?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (d) Neither 1 nor 2
Explanation
Tax revenue and fiscal deficit, 2007 to 2017
The key word in both statements is 'steadily'.
Neither ratio moved in one direction.
| Statement | Verdict | Fact |
|---|---|---|
| 1. Tax revenue as a percent of GDP has steadily increased in the last decade | Incorrect | It peaked in 2007-08, fell after the 2008 crisis, then recovered slowly |
| 2. Fiscal deficit as a percent of GDP has steadily increased in the last decade | Incorrect | It jumped in 2008-09 and 2009-10, then declined |
Centre's fiscal deficit:
| Year | Percent of GDP |
|---|---|
| 2007-08 | About 2.5 |
| 2009-10 | About 6.5 (stimulus after the global crisis) |
| 2016-17 | About 3.5 |
The FRBM Act, 2003 targets a fiscal deficit of 3 percent of GDP.
Answer: (d) Neither 1 nor 2.
Why each option is right or wrong
- (a) Incorrect. Tax revenue as a percent of GDP fell after 2007-08; it did not rise steadily.
- (b) Incorrect. The fiscal deficit rose sharply and then fell; it did not rise steadily.
- (c) Incorrect. Neither ratio has steadily increased over the last decade.
- (d) CORRECT. Both tax revenue and fiscal deficit ratios went up and down.
Key point
2007-17: tax-GDP ratio peaked in 2007-08, dipped, then recovered; fiscal deficit rose to about 6.5 percent in 2009-10 and fell to about 3.5 percent.
Remember
Neither tax ratio nor fiscal deficit rose steadily.
Common mistakes
- Ignoring the word 'steadily', which needs a rise every year.
- Assuming the fiscal deficit always rises; it fell after 2011-12.
- Confusing a rise in tax collections with a rise in the tax-GDP ratio.
Exam tip
'Steadily increased' is rarely true of any economic ratio. One bad year breaks it.
Sources
- Ministry of Finance — Economic Survey 2016-17 (Fiscal Developments)
- Reserve Bank of India — Handbook of Statistics on the Indian Economy