Examine the role of tax buoyancy in achieving sustainable economic growth. Analyze the challenges in maintaining a stable tax-to-GDP ratio. Suggest measures to enhance revenue mobilization while ensuring fiscal discipline.

Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development

Q6. Examine the role of tax buoyancy in achieving sustainable economic growth. Analyze the challenges in maintaining a stable tax-to-GDP ratio. Suggest measures to enhance revenue mobilization while ensuring fiscal discipline. (15 M)

Difficulty Level: Medium

Reference: TH

Why the question
“India has to maintain a tax buoyancy in the range of 1.2-1.5 to achieve a growth of 6.5-7%,” an EY report said

Key demand of the question
The question requires an explanation of tax buoyancy’s role in economic growth, identification of challenges in maintaining a stable tax-to-GDP ratio, and suggesting revenue mobilization measures while ensuring fiscal discipline. A structured analysis with a balanced conclusion is needed.

Structure of the answer

Introduction
Define tax buoyancy and its significance in ensuring sustainable economic growth. Mention India’s tax-to-GDP trends and policy focus on fiscal stability.

Body

• Role of tax buoyancy in economic growth – Explain how stable tax revenue enables public investment, macroeconomic stability, fiscal discipline, and inclusive development.
• Challenges in maintaining a stable tax-to-GDP ratio – Discuss issues like tax evasion, reliance on indirect taxes, slow tax base expansion, policy unpredictability, and state-level fiscal imbalances.
• Measures for revenue mobilization and fiscal discipline – Suggest reforms like direct tax base expansion, GST optimization, subsidy rationalization, disinvestment, and adherence to fiscal consolidation targets.

Conclusion
Emphasize the need for a balanced approach between tax efficiency, compliance reforms, and fiscal prudence to achieve sustainable growth and macroeconomic stability.