4. Issues in Mobilization of Resources

A. There exists vertical imbalance (between the Centre and the States) and horizontal imbalance (among the states with varying fiscal capacities) in the distribution of financial resources.

B. Fiscal Consolidation – against the background of continuing resource asymmetry, most States achieved the statutorily envisaged fiscal consolidation by 2006 itself. They brought down the fiscal deficit to less than 3 per cent of the GDP and wiped out the revenue deficit as mandated. But the Centre did not comply with the FRBM mandate and it has not been able to control its revenue expenditure.

C. Low Tax-to GDP ratio:- India’s tax-to-GDP ratio for 2017-18 was 11.6% and is well below the emerging market economies and OECD averages of about 21% and 34% respectively. Key reasons for India’s low tax-GDP ratio are:

♤ Structural factors such as low per capita income keep tax collections low.

♤ Exemptions in the taxable income have grown at a much faster rate than the income reducing tax buoyancy.

♤ A lack of policy initiatives has also kept the tax rate low such as certain tax exemptions to income generated by small and medium enterprises and agriculture related activities.