Question map
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 ?
Explanation
The correct answer is option D (Neither 1 nor 2).
**Statement 1 Analysis:** India's tax revenue as a percentage of GDP did not show a steady increase during 2007-2017. While tax revenue data is tracked as a percent of GDP by the World Bank[1], the actual trend during this period showed fluctuations rather than consistent growth. The tax-to-GDP ratio experienced variations due to economic cycles, policy changes, and implementation challenges.
**Statement 2 Analysis:** India's fiscal deficit as a percentage of GDP also did not steadily increase during this decade. In fact, fiscal consolidation post-2010 was achieved, with consolidations in "non-special" category[2] states being driven by increased revenues[2]. The period saw efforts to reduce fiscal deficits, particularly after the 2008-09 global financial crisis spike, with the government working toward fiscal consolidation targets. The fiscal deficit generally declined or remained stable during the latter part of this period, rather than showing a steady increase.
Therefore, both statements are incorrect, making option D the correct answer.
Sources- [2] https://thedocs.worldbank.org/en/doc/400139d320ead96a0ec624d3608d9b56-0310012025/original/India-Country-Economic-Memorandum-2024-0227c.pdf
PROVENANCE & STUDY PATTERN
Full viewThis is a classic 'Trend Analysis' trap. UPSC takes a volatile economic indicator and adds the word 'steadily' or 'continuously' to test if you remember major economic shocks (like the 2008 crisis). You don't need exact numbers; you need to know the 'shape' of the graph.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
This textbook presents the exact claim as an exam-style proposition, signalling it is non-trivial and contested (an item for verification rather than accepted fact).
A student should treat the claim as testable: locate year-by-year tax-revenue/GDP ratios for 2007–08 through 2016–17 (e.g., from budget documents or RBI) and check for a monotonic upward pattern.
Discusses the tax/GDP ratio as an explicit policy metric and links it to economic growth—implying tax/GDP can change with growth and policy (wider base vs higher rates).
Combine knowledge of India’s growth episodes and any tax policy changes in 2007–17 (e.g., base changes, major tax reforms) to judge whether tax/GDP would plausibly rise steadily or fluctuate.
Describes fiscal consolidation since 1991 and notes fiscal deficits/revenue deficits trend dynamics—showing deficits and fiscal policy can influence revenue measures as % of GDP.
Compare periods of fiscal consolidation or rising deficits in 2007–17 with tax revenue series to see if policy shifts explain increases or declines in tax/GDP.
Explains GDP measurement (nominal vs real) and notes government indirect taxes are part of GDP at market prices—highlighting the importance of using consistent GDP definition when computing tax/GDP.
When assembling tax/GDP time series for 2007–17, ensure taxes (central+state) are compared to the same GDP series (nominal at market prices) to avoid spurious trends.
Provides recent deficit-to-GDP figures and emphasizes that fiscal indicators vary year-to-year, suggesting that related ratios (like tax/GDP) may also not be monotonic.
Use the documented year-to-year variability in fiscal ratios as a cue to expect possible non-steady behavior in tax/GDP; check annual tax receipts against GDP for volatility in 2007–17.
- States enacted subnational fiscal rules in 2007 targeting a 3% fiscal deficit of GSDP, implying policy action to constrain deficits starting in 2007.
- The passage states that on aggregate, subnational deficits and debt declined as a share, which contradicts a steady increase over the decade.
- The passage describes fiscal consolidation after 2010, indicating deficits were reduced rather than continuously rising.
- It notes consolidation was achieved by reducing productive/capital expenditures and increasing revenues in some states, showing active deficit reduction measures.
Describes the historical use of deficit financing and that post-1991 India moved toward fiscal consolidation, suggesting policy intent to reduce large or rising deficits.
A student could combine this with knowledge of FRBM-era targets and year-by-year budget data (2007–2017) to test whether policy and practice produced a steady increase.
Gives a concrete datum (gross fiscal deficit reached ~6% of GDP around 2000) and states the FRBM Act was enacted to keep deficits under control.
Using the FRBM introduction as a breakpoint, a student could compare pre- and post-FRBM fiscal-deficit trajectories across 2007–2017 to see if a steady rise is consistent with the Act's objectives.
States the FRBM mandated reduction of fiscal deficit by an annual rule (e.g., steps toward 3% of GDP), giving a concrete rule of expected year-on-year decline.
A student can apply this required annual reduction rate to expect a downward trend; divergence from this expectation in 2007–2017 would argue against a steady increase.
Shows that fiscal deficit values can fluctuate substantially (example: 4.6% in 2019-20, 9.5% in 2020-21), illustrating that deficits are responsive to events and not necessarily monotonic.
By analogy, a student should check for major shocks (global financial crisis, domestic shocks) in 2007–2017 that could cause non-steady movement rather than a smooth increase.
Defines 'fiscal slippage' with a specific example where the actual deficit slightly exceeded the estimate, indicating year-to-year deviations are common.
A student could use the concept to examine 2007–2017 budget estimates vs actuals to see whether small slippages produced a steady upward path or only intermittent variations.
- [THE VERDICT]: Logic Trap / Heuristic Question. Source: Economic Survey (Statistical Appendix), not standard textbooks.
- [THE CONCEPTUAL TRIGGER]: Macroeconomic Trends & Fiscal Policy (GS3 Budgeting). specifically the 'Fiscal Consolidation' path vs. Global Shocks.
- [THE HORIZONTAL EXPANSION]: Memorize the 'Shape' of these 5 curves for the last decade: 1) Tax-to-GDP (Stagnant/Fluctuating ~10-11%), 2) Fiscal Deficit (Spiked 2008, then consolidation attempts), 3) Debt-to-GDP (General decline until 2019/Covid), 4) Savings Rate (Peaked ~2011, then declined), 5) Investment Rate (Peaked ~2011, then declined).
- [THE STRATEGIC METACOGNITION]: Apply 'Event History' rather than rote data. Ask: 'Did a major crisis happen in the last 10 years?' (Yes, 2008 Global Crisis). A crisis forces the Govt to cut taxes or increase spending (stimulus). Therefore, no fiscal line can be 'steady' over that decade.
Understanding how tax receipts are counted in GDP (taxes on products/indirect taxes are added when converting factor cost to market prices) clarifies how tax revenue relates to the GDP denominator used in the ratio.
High-yield for fiscal questions: knowing what components of taxes enter GDP at market prices helps interpret tax/GDP ratios and compare time series across revisions. Connects to public finance (tax buoyancy, tax base) and national accounts; useful for questions asking whether tax ratios rose due to revenue growth or GDP measurement changes.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.12 Nominal and Real GDP > p. 19
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 8: Inclusive growth and issues > 8.13 Rising Income Inequality > p. 276
Trends in tax/GDP depend on the GDP measure used (nominal or real) and on base-year revisions that can alter the denominator across a decade.
Important for interpreting time-series trends: aspirants must distinguish whether a rise in tax/GDP is from higher nominal taxes, lower inflation-adjusted GDP growth, or rebasing. This concept links macro measurement to fiscal indicators and is often tested in both prelim and mains analyses of fiscal trends.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.12 Nominal and Real GDP > p. 19
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Real versus Nominal GDP > p. 8
Trends in deficits and fiscal consolidation efforts (e.g., FRBM) affect government fiscal stance, tax policy and revenue mobilisation — all relevant when judging whether tax revenue ratios rose steadily.
Understanding deficits, revenue deficit, and policy frameworks (FRBM) helps aspirants connect tax revenues to fiscal policy choices and macro outcomes. This is frequently used in mains answers assessing causes of movements in fiscal ratios and policy responses.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Status of Deficit Financing in India > p. 114
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > PRESENT TREND IN DEFICITS > p. 112
FRBM is repeatedly cited in the references as the legislative framework intended to reduce and cap fiscal deficits, directly relevant to trends in deficit/GDP.
High-yield: FRBM is central to questions on fiscal consolidation, targets and institutional reform. It links to budgetary policy, macroeconomic stability and fiscal rules. Mastering FRBM helps answer questions on policy intent versus outcomes and to evaluate whether deficits should have risen or fallen during a period.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.7 Fiscal Responsibility and Budget Management (FRBM) Act 2003 > p. 156
- Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Main Features > p. 81
Understanding what fiscal deficit measures and how it is financed is necessary to interpret any stated trend in deficit/GDP ratios.
High-yield: Knowing the definition and financing channels (borrowing, non-debt receipts) allows aspirants to read budget tables, compare year-on-year ratios, and critique statements about rising/falling deficits. This concept connects to public debt, revenue vs. primary deficits, and fiscal slippage questions.
- Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.2.1 Measures of Government Deficit > p. 72
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Fiscal Slippage > p. 117
References note a post-1991 move toward fiscal consolidation (and FRBM enactment later), which bears on whether deficits would 'steadily increase' during 2007–2017.
High-yield: Historical trajectory contextualises decade-specific claims. UPSC often asks for trend analysis (pre/post reforms), requiring candidates to relate policy reforms to outcomes. This helps in answering comparative and cause-effect questions on fiscal indicators.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Status of Deficit Financing in India > p. 114
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.7 Fiscal Responsibility and Budget Management (FRBM) Act 2003 > p. 156
Tax Buoyancy. Since Tax/GDP is fluctuating, the next logical question is on 'Tax Buoyancy' (responsiveness of tax revenue to GDP growth). Shadow Fact: Tax Buoyancy in India is NOT consistently greater than 1; it fluctuates wildly year-on-year.
The 'Crisis Check' Hack. Whenever a statement says an economic parameter moved 'steadily' for a decade, mentally check for ONE major disruption in that timeline (e.g., 2008 Crisis, 2013 Taper Tantrum, 2016 Demonetization). If a disruption exists, the 'steady' line is broken. Mark it wrong immediately.
Mains GS3 (Fiscal Policy): A low Tax-to-GDP ratio (approx 11% for Centre, 17% combined) constrains the 'Fiscal Space'. This forces the government to borrow (Fiscal Deficit), leading to high interest payments (Revenue Deficit), which crowds out Capital Expenditure (Infrastructure). This cycle is the core of India's fiscal challenge.