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Q. Sharp surge in government spending and its impact: Discuss the issues of sharp surge in government spending in last one year and its impact.
Sep 05, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently published annual report of the Reserve Bank of India highlighted that 2015-16 financial year has witnessed sharp surge in spending by Central and State governments.

Key aspects of report-

  • The total expenditure of the central and state governments went down from a peak level 27.7% of the GDP in 2011-12 to a low of 25.1% of the GDP in 2014-15, a decline of 2.6% points over four years.
  • But, the total expenditure of the central and state governments has sharply picked up to 28.2% of the GDP in 2015-16, a pickup of 3.2% points in just one year, and it is now expected to further go up to 28.3% of the GDP as per the budget estimates for 2016-17.

Issues and Impact-

  • The increased spending has been financed through additional revenue mobilisation, means the brunt of the burden has fallen on indirect taxes.
  • The brunt of the additional tax mobilisation efforts has fallen on commodities and services which is paid disproportionately by lower and marginalised section of the society.
  • Indirect tax collection went up by 22% in 2015-16 and is further expected to increase by 12.5% in 2016-17. In contrast direct tax collection went up by 10.2% i.e. half of the level of indirect taxes, which is not good sign for economy.
  • The disproportionate increase in burden of indirect taxes has steadily pushed up their share in total government tax revenues from 59.6% in 2014-15 to 62.3% by 2016-17 whereas the share of direct taxes on property and income shrunk from 40.2% to 37.6% during the period.
  • Hence such a sharp surge in spending of government by massive mobilisation of indirect taxes have huge impact on poor, because certainly it is poor who had to bear the brunt of the government spending.

Conclusion-

Manifold increase in the government spending through indirect tax collection is not good sign for any economy. It is the poor who will get affected most due to increased tax collection. It will increase the prices of commodities, and poor will lose their purchasing power. Hence this issue needs to be addressed with more cautiously.


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