Taxation is the primary instrument for government resource mobilisation, essential for funding public goods and welfare programmes. But the State raises resources through three broad channels — tax revenue, non-tax revenue, and public borrowing — and increasingly deploys public investment as an active growth catalyst.

A government’s fiscal capacity is the quiet foundation of everything else it does. India’s challenge is not a shortage of ambition but a shortage of revenue — a low tax-to-GDP ratio that constrains how much can be spent on infrastructure and welfare. — Legacy IAS Faculty

Tax Revenue — The GST Regime

GST was a landmark reform aimed at creating a unified national market. While it has improved formalisation and revenue buoyancy for states, its reform agenda remains unfinished. Key structural issues include:

• Exclusion of Key Items: petroleum products, electricity, and alcohol remain outside the GST ambit, breaking the value chain and cascading taxes.
• Complex Rate Structure: the multiple-rate structure complicates compliance and leads to classification disputes.
• Cess and Surcharges: imposing cesses on top of GST undermines the ‘one nation, one tax’ principle. The share of cesses and surcharges in gross tax revenue fell to 14.5% in 2023-24, down from a peak of 20.2% in 2020-21.

Analysing India’s Low Tax-to-GDP Ratio

A key challenge for India has been its low tax-to-GDP ratio, which stands at 11.7% (2024) — much lower than the OECD average of 34.3% and the emerging-market average of 20–25%.

Key reasons for the low ratio:

• Large Informal Economy: around 50% of India’s GDP is informal and remains largely untaxed, limiting the tax base.
• Tax Exemptions and Loopholes: exemptions in sectors like agriculture and exports reduce overall tax revenue.
• Low Per Capita Income: with per capita income around $2,600 in FY25, the tax-paying base remains limited.
• Inefficient Tax Collection: tax evasion and administrative inefficiencies reduce the system’s effectiveness.
• Dependence on Indirect Taxes: indirect taxes (e.g., GST) contribute significantly but are less progressive, limiting their ability to capture income from higher earners.

A low ratio limits the government’s fiscal capacity to invest in infrastructure and social sectors. Encouragingly, the ratio has been rising recently on the back of better direct-tax collection, tax reforms, and improved compliance — signalling a positive shift in India’s tax system.

Non-Tax Revenue

Disinvestment as a Strategic Tool

Disinvestment — the sale of government equity in Public Sector Enterprises (PSEs) — has evolved from a purely revenue-raising exercise into a strategic policy tool. Under the “New PSE Policy”, the government aims to maintain only a “bare minimum” presence in strategic sectors while privatising or closing PSEs in non-strategic sectors. It is intended to improve efficiency, unlock capital, and let the government exit non-core areas.

• As of FY25, the government accrued only ₹9,319 crore through disinvestment (lower than ₹16,507 crore in FY24) — the lowest level since 2014-15, despite the post-pandemic recovery.
• By contrast, in 2018-19 the government collected ₹84,972 crore from CPSE disinvestment, higher than the ₹80,000 crore pegged in that year’s Budget.

Asset Monetisation Plan

Union Budget 2025 announced India’s Asset Monetisation Plan 2025-30, a strategy to leverage existing public infrastructure assets and create non-tax revenue to reinvest in new projects. It builds on the earlier National Monetisation Pipeline (NMP) 2021-25, which planned to generate ₹10 lakh crore by monetising functioning brownfield assets across Highways, Railways, Power, Telecom, and Aviation.

Key challenges:

• Asymmetrical Performance: uneven across sectors, with the Ministry of Railways meeting only 30% of its revised goals, pressuring other sectors to compensate.
• Asset Valuation: assessing fair market worth is intricate and may cause under- or over-valuation; capturing private investment needs transparent revenue frameworks and risk-reduction strategies.
• Regulatory & Policy Challenges: prolonged approvals and varying sectoral regulations may delay transactions; agencies may lack the skills to manage intricate monetisation. Effective implementation needs transparency and stakeholder collaboration across government, private sector, and civil society.

Dividends from PSUs & RBI Surplus Transfer

Other significant non-tax revenue sources include dividends paid by profitable PSUs and the transfer of surplus profits from the RBI to the government. The RBI approved a bumper surplus transfer of ₹2.69 lakh crore for FY 2024-25 — 27% higher than the ₹2.11 lakh crore transferred for 2023-24.

Public Borrowing & Fiscal Management

Government borrowing is a key tool to finance fiscal deficits, but high public debt can threaten macroeconomic stability by raising interest burdens and potentially crowding out private investment. The central challenge is managing this debt while continuing to fund growth — especially in the post-pandemic era of elevated public debt.

• FRBM Act, 2003: provides the legislative framework for fiscal prudence by setting targets for fiscal and revenue deficits, periodically reviewed to balance discipline with growth needs.
• Post-COVID consolidation: the 2021-22 Budget introduced a plan to cut the fiscal deficit to below 4.5% by 2025-26.
• New fiscal anchor: the Centre aims to make the debt-to-GDP ratio the primary fiscal anchor from FY27, targeting a central debt ratio of 50% by 2031.

Debt-to-GDP ratios:

• Central Government (FY 2024-25 RE): 57.1%.
• General Government (incl. states): ~80–81%.

India’s debt-to-GDP is moderate compared with advanced economies like the USA, but higher than many emerging markets; the central government’s share is lower than the general government’s.

Why Shift to a Debt-to-GDP Anchor? (N.K. Singh Committee)

• Long-Term Fiscal Sustainability: debt-to-GDP captures the sustainability of borrowing over time, not just annual flows.
• Greater Policy Flexibility: allows counter-cyclical spending in shocks (recessions, pandemics) without rigid annual deficit limits.
• Improved Transparency: by including off-budget borrowings and contingent liabilities, it gives a clearer picture of total obligations.
• Global Best Practices: aligns India with advanced economies (e.g., EU, Germany), boosting investor confidence.
• Growth-Enhancing Expenditure: lets governments sustain productive public investment as long as overall debt stays sustainable.

Public Investment as a Growth Catalyst

In recent years, the government has significantly ramped up public capital expenditure to drive growth and modernise the economy.

• Infrastructure: Union Budget 2025-26 allocated a then-historic ₹11.21 lakh crore (3.1% of GDP) for capex, focusing on comprehensive infrastructure under PM Gati Shakti.
• Clean & Nuclear Energy: viability gap funding for offshore wind, support for the EV ecosystem, and a biomass-aggregation scheme; a new Nuclear Energy Mission with a ₹20,000 crore outlay for R&D in Small Modular Reactors (SMRs); PM Surya Ghar Muft Bijli Yojana to solarise 1 crore households.
• Agriculture & Housing: ₹20 lakh crore for agricultural credit and an Agriculture Accelerator Fund; PM Awas Yojana to build 30 million affordable rural houses and serve 1 crore urban poor families.
• R&D Challenge: India’s R&D spend is just ~0.7% of GDP, far below China (2.4%), with the private sector contributing only 37% — the Budget allocated ₹20,000 crore to the Ministry of Science & Technology to boost innovation.

Recent Update — Budget 2026-27 & Public Finances Snapshot

The latest Budget continues the capex-led, fiscal-consolidation path with a decisive move to debt-based targeting.

• Capex composition: roads (₹2.94 lakh crore) and railways (₹2.77 lakh crore) make up nearly 65% of capex; defence capital outlay rises to ₹2.19 lakh crore. Effective capex reaches ~4.36% of GDP.
• Non-tax revenue boost: a record RBI surplus and a large disinvestment budget (including a possible IDBI Bank divestment in FY27) underpin receipts.
• New instruments: an Infrastructure Risk Guarantee Fund to reassure private developers, a ₹10,000 crore SME Growth Fund, and a ₹20,000 crore Carbon Capture, Utilisation & Storage outlay over five years; MGNREGA has been recast as the VB-G RAM-G rural employment scheme.

Probable Prelims MCQs (Application-Based)

UPSC-standard practice on public resource mobilisation. Tap to reveal the answer and reasoning.

Frequently Asked Questions

Q1. Why is India’s tax-to-GDP ratio so low?

Mainly because a large informal economy (~50% of GDP) stays untaxed, per capita income (~$2,600) keeps the tax-paying base small, exemptions in agriculture and exports erode revenue, and the system leans on less-progressive indirect taxes. Better direct-tax compliance is now nudging the ratio upward.

Q2. What is the difference between disinvestment and asset monetisation?

Disinvestment sells government equity/ownership in PSEs (and at the extreme, privatises them). Asset monetisation leases or transfers the right to operate existing brownfield assets (highways, railway lines) for a period while the government retains ownership — a non-debt-creating revenue source.

Q3. Where does the RBI surplus transfer come from, and why does it matter?

It is the RBI’s net income from interest on its bond holdings, gains on foreign-exchange assets, and seigniorage from issuing currency — transferred after retaining risk buffers under the Economic Capital Framework (Section 47, RBI Act 1934). At a record ₹2.87 lakh crore for FY26, it is a major non-tax revenue source that eases the fiscal deficit.

Q4. Why is India shifting from a fiscal-deficit to a debt-to-GDP anchor?

The debt-to-GDP ratio better captures long-term sustainability, allows flexible counter-cyclical spending in shocks, improves transparency by including off-budget liabilities, and aligns India with global practice — letting the government sustain productive capex as long as debt stays on a credible downward path.