Daily Quiz: UPSC Prelims Marathon (Economy) – May 26, 2020

Tax-to-GDP.

Statement 1 is correct: Tax-to-GDP ratio represents the size of a country’s tax kitty relative to its GDP. It is a representation of the size of the government’s tax revenue expressed as a percentage of the GDP. Higher the tax to GDP ratio the better financial position the country will be in. The ratio represents that the government is able to finance its expenditure. A higher tax to GDP ratio means that the government is able to cast its fiscal net wide. It reduces a government’s dependence on borrowings.

Statement 2 is correct: Although India has improved its tax-to-GDP ratio in the last six years, it is still far lower than the average OECD ratio which is 34 per cent. India’s tax-to-GDP ratio is lower than some of its peers in the developing world. Developed countries tend to have higher tax-to-GDP ratio.

Inflation Targeting Framework.

Statement 1 is correct: In his first speech as RBI Governor, Raghuram Rajan (Reserve Bank of India, 2013) emphasized on the importance of inflation targeting and set up an Expert Committee under Deputy Governor Urjit Patel to assess the current monetary policy and give recommendations to strengthen it.

Statement 2 is correct: The RBI Act was amended on May 14, 2016 to give the key provisions in the Monetary Policy Framework Agreement (MPFA) a statutory basis.

At the national level, there are four Consumer Price Index (CPI) numbers. These are:

• CPI for Industrial Workers (IW),
• CPI for Agricultural Labourers (AL),
• CPI for Rural Labourers (RL) and
• CPI for Urban Non-Manual Employees (UNME).

The base years of the current series of CPI (IW), CPI (AL) and CPI (RL), and CPI (UNME) are 1982, 1986-87 and 1984-85, respectively. While the first three are compiled and released by the Labour Bureau in the Ministry of Labour, the fourth one is released by the Central Statistical Organisation under the Ministry of Statistics and Programme Implementation.

Note – CPI for Urban Non-Manual Employees (UNME) has been discontinued since Dec 2010.

Internal debt of India consists of:

• Dated government securities or G-secs.
• Treasury Bills or T-bills
• External Assistance
• Short term borrowings
• Public Debt definition by Union Government

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

Crowding out Effect

In some situations, such as high budget deficit etc, there is rise in government borrowing from the market. Due to the excessive borrowing by the government from the market, there is little credit left for private sector to borrow. As a result, interest rate rises, making borrowings by private sector costly and leading to decline in private investment. This is known as crowding out effect. The private borrowing and subsequent private investment is discouraged.

The law of supply states that there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve. The determinants of supply: changes in non-price factors that will cause an entire supply curve to shift (increasing or decreasing market supply); these include

• the number of sellers in a market,
• the level of technology used in a good’s production,
• the prices of inputs used to produce a good,
• the amount of government regulation, subsidies or taxes in a market,
• the price of other goods sellers could produce, and
• the expectations among producers of future prices.

Stealth taxes are sometimes built into the prices of products so that consumers do not see how much tax they are paying. In comparison to income taxes and property taxes, stealth taxes are smaller and less visible. Because of their lower visibility they attract significantly less attention than income or property taxes. Governments find stealth taxes easier to collect than other types of taxes because the government collects them at the point of sale and they do not depend on a taxpayer’s income level. The most common stealth tax is the sales tax.

As per the Walrus law, ‘the total value of goods demanded in an economy is always identically equal to the total value of goods supplied’. For this to happen, the economy should be in equilibrium. It also means that if there is an excess supply of certain things in one market there must be excess demand for it in another market. Here ‘another market’ does not mean the market of another economy—it is taken as, apple’s market, grape’s market (as ‘separate’ markets). This could be only correct in a barter economy (it does not work in an economy with currency as its mode of exchange). The idea was part of the ‘general equilibrium theory’ developed by the French mathematical economist Marie-Esprit-Leon Walras (1834-1910), after whom it is named.

Tobin tax.

Statement 1 is correct: It is a proposal of imposing small tax on all foreign exchange transactions with the objective to discourage destabilizing speculation and volatility in the foreign exchange markets.

Statement 2 is incorrect: Proposed by the Nobel prize-winning economist James Tobin (1918– 2002), the tax has never been implemented anywhere in the world so far.