Note4Students
From UPSC perspective, the following things are important :
Mains level: Issues related to the Judiciary;
Why in the News?
The Union Budget offers a major tax cut, benefiting taxpayers earning above ₹7 lakh. Rebates and exemptions have increased to reduce liabilities, though it may lead to an estimated ₹1 lakh crore revenue loss.
What is the logic behind the tax rebates?
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What are the implications if tax buoyancy does not work out?
- Revenue Shortfalls: A failure in tax buoyancy would lead to lower than expected tax revenues, resulting in budget deficits. This could force the government to cut essential services and social programs, negatively impacting the welfare of vulnerable populations.
- Pro-Cyclical Fiscal Policy: Insufficient tax revenue may compel the government to adopt a pro-cyclical fiscal policy, reducing public spending during economic downturns instead of stimulating growth. This can exacerbate economic slowdowns and hinder recovery efforts.
- Increased Tax Burden on Compliant Taxpayers: To compensate for revenue shortfalls, the government might increase taxes on those who continue to pay taxes, placing a heavier burden on compliant taxpayers and potentially discouraging further compliance and economic activity.
Is it ‘Fiscal Consolidation’ or ‘Fiscal Contraction’?
- The current approach appears to lean more towards fiscal contraction rather than fiscal consolidation. The Finance Minister has set a lower deficit target of 4.4% for 2025-26, down from 4.8% in the previous year. This suggests a tightening of fiscal policy rather than an expansion aimed at stimulating growth.
- Critics argue that such contractionary measures are ill-timed given the current economic slowdown, as they limit the government’s ability to invest in growth-promoting initiatives. The expectation seems to hinge on corporate investment and export growth to drive recovery, which may not be sufficient if domestic demand remains weak due to reduced government spending.
| Aspect | Consolidation Argument | Contraction Criticism |
| Deficit Target | Lowered to 4.4% of GDP (from 4.8% in FY24), aiming for 3% by FY29 | Aggressive deficit cuts during slowing growth (projected 10.1% nominal GDP) risk stifling recovery |
| Revenue Strategy | Bank on ₹28.37 trillion net tax receipts (+11% YoY) via compliance gains and income growth | No compensatory taxes for high earners (30% slab unchanged) or wealth assets, risking ₹1.26 lakh crore shortfall |
| Expenditure Focus | Capital expenditure raised to ₹11.2 lakh crore (+17.4% YoY) for infrastructure multipliers | Social sector allocations remain stagnant, with FY24 revised spending 15% below initial estimates. |
Way forward:
- Balanced Fiscal Approach – Instead of aggressive fiscal contraction, the government should adopt a gradual deficit reduction strategy while maintaining targeted public spending, especially in infrastructure and social sectors, to sustain domestic demand and economic growth.
- Enhancing Revenue without Burdening Taxpayers – Strengthen tax compliance through digital tracking, rationalize subsidies, and explore progressive taxation on wealth and high-income segments to ensure fiscal stability without increasing the burden on the middle class.
Mains PYQ:
Q Comment on the important changes introduced in respect of the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. (UPSC IAS/2018)
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