CDS (II) 2020 General Knowledge · Question 4 of 120

Correct — C, the claim that the fiscal deficit as a percentage of GDP has been as per the Budget Estimates. It was not. The July 2019 Budget targeted a fiscal deficit of 3.3 per cent of GDP for 2019-20; the revised estimates presented a year later put it at 3.8 per cent, and the following Budget recorded the target as breached. The other three statements describe what actually happened. Growth did decelerate through the year. Tax revenue grew sluggishly against the Budget Estimates, and badly so: gross tax revenue was budgeted at Rs 24,61,195 crore and revised down to Rs 21,63,423 crore, with corporation tax alone falling from Rs 7,66,000 crore to Rs 6,10,500 crore after the September 2019 rate cut. Non-tax revenue moved the opposite way, rising from Rs 2,35,704 crore actually collected in 2018-19 to Rs 3,45,513 crore in the revised estimates, a jump of over 46 per cent driven largely by dividends and profits of Rs 1,99,893 crore.

• (a)There has been deceleration in growth rate. — This is correct, not incorrect. The slowdown through 2019-20 was the dominant economic story of the year and is why the tax shortfall opened up.
• (b)There has been sluggish growth in tax revenue relative to the Budget Estimates. — Correct, and by a wide margin — gross tax revenue came in about Rs 2.98 lakh crore below the Budget Estimates at the revised stage.
• (d)The non-tax revenue registered a considerably higher growth. — Correct. Non-tax revenue rose about 46 per cent over the previous year's actuals, and even exceeded its own Budget Estimate, mainly on dividends and profits.

The fiscal deficit is the gap between total expenditure and total receipts other than borrowings; it is the amount the Government must borrow in a year, and it is conventionally stated as a percentage of GDP so that years can be compared. A Budget sets a target for it in advance as a Budget Estimate. Part way through the year the Government publishes a Revised Estimate, and the following year the actuals. When revenue falls short and expenditure is not cut to match, the revised estimate of the deficit rises above the target.

The reasoning here is mechanical once you see it. Three of the four statements are consistent with one another and with a slowing economy: growth slows, tax collections undershoot, and the Government leans on dividends and other non-tax receipts. If those three are true, then the fourth — that the deficit nonetheless landed exactly on target — is the one that cannot be. A deficit target survives a revenue shortfall only if spending is cut by the same amount, and expenditure in 2019-20 was not cut. It is worth adding one honest note about the numbers: a year that ended in the first weeks of the COVID-19 disruption produced unusually wide gaps between estimate and outturn, and the deficit was later revised further upward when the actuals came in, so 3.8 per cent is the revised-estimate figure the exam is working from rather than a final number.

• Fiscal deficit 2019-20: Budget Estimate 3.3 per cent of GDP, Revised Estimate 3.8 per cent.
• Gross tax revenue fell from a Budget Estimate of Rs 24,61,195 crore to a Revised Estimate of Rs 21,63,423 crore.
• Corporation tax was the single biggest casualty, from Rs 7,66,000 crore budgeted to Rs 6,10,500 crore revised.
• Non-tax revenue rose to Rs 3,45,513 crore at the revised stage, with dividends and profits contributing Rs 1,99,893 crore.
• Devolution to the States was cut by about 19 per cent, from Rs 8,09,133 crore budgeted to Rs 6,56,046 crore, because the shrinking divisible pool is shared.

• Assuming the Budget target is what actually happened. The Budget Estimate is an intention; the Revised Estimate is the correction.
• Confusing revenue deficit with fiscal deficit — the revenue deficit for 2019-20 was revised to 2.4 per cent, not 3.8 per cent.
• Forgetting that a shortfall in the Centre's gross tax revenue automatically cuts what the States receive as devolution.

As a which-statement-is-not-correct item on a named year's Union finances, or as a direct question on that year's fiscal deficit target and outturn.

• practice — not a real PYQ

  The fiscal deficit of the Union Government is best described as which one of the following?

  • (a)The excess of revenue expenditure over revenue receipts
  • (b)The excess of total expenditure over total receipts excluding borrowings
  • (c)The excess of total expenditure over total receipts including borrowings
  • (d)The fiscal deficit less interest payments

  Answer(b) The excess of total expenditure over total receipts excluding borrowings — that gap is exactly what the Government has to borrow. Option (a) defines the revenue deficit and option (d) the primary deficit.

• practice — not a real PYQ

  A sharp fall in the Union Government's gross tax revenue in a year has which one of the following immediate consequences for the States?

  • (a)No effect, since States rely only on their own taxes
  • (b)A reduction in tax devolution, because the divisible pool shrinks
  • (c)An automatic increase in central grants to compensate them
  • (d)A reduction only in the States' Goods and Services Tax collections

  Answer(b) A reduction in tax devolution — the States receive a share of the Centre's divisible pool, so in 2019-20 devolution fell from Rs 8,09,133 crore budgeted to Rs 6,56,046 crore.