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How does rising public debt burden the economy? Discuss the measures introduced by the Fiscal Responsibility and Budget Management Act, 2003 to mitigate this issue. (200 words)
Model Answer How Rising Public Debt Burdens the Economy Rising public debt imposes significant pressures on an economy in various ways: Burden on Future Generations Public debt transfers the financial burden to future generations. Governments issue bonds to raise funds for current expenditures, whicRead more
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How Rising Public Debt Burdens the Economy
Rising public debt imposes significant pressures on an economy in various ways:
Public debt transfers the financial burden to future generations. Governments issue bonds to raise funds for current expenditures, which will need to be repaid in the future. This means that the next generation will bear the responsibility of repaying the debt, often through higher taxes or reduced government spending (Source: FRBM Act, 2003).
As public debt rises, the government must allocate a larger portion of its budget to pay interest on the debt. This reduces the funds available for essential services, like education, healthcare, and infrastructure. Over time, higher interest payments can crowd out other critical investments in the economy (Source: Government of India).
Excessive government borrowing can lead to inflation. Increased borrowing often raises interest rates, making it costlier for businesses and consumers to borrow. Moreover, higher government spending increases aggregate demand, which can drive up prices (Source: RBI reports).
Public borrowing can lead to “crowding out” of private investment. When the government issues bonds to finance its deficits, it competes with private companies for available funds. This can lead to higher interest rates, making it more difficult for businesses to obtain credit for expansion (Source: Economic Survey, 2020).
Measures Under the Fiscal Responsibility and Budget Management Act, 2003
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted to manage public debt and ensure fiscal discipline:
The Act mandates the government to reduce the fiscal deficit to below 3% of GDP. This limit ensures the government does not overspend beyond its means and curtails excessive borrowing (Source: FRBM Act, 2003).
It also requires the government to eliminate the revenue deficit and work towards creating a revenue surplus. This enhances fiscal health by ensuring that the government’s recurring expenditures are covered by its regular income (Source: Ministry of Finance).
The Act restricts borrowing from the Reserve Bank of India, ensuring that the government does not excessively rely on the central bank for financing. This reduces inflationary pressures and ensures that monetary policy remains independent (Source: FRBM Act, 2003).
In conclusion, the FRBM Act provides a structured framework for managing public debt, aiming for long-term macroeconomic stability by curbing excessive borrowing and promoting fiscal responsibility.
See lessWhat is your understanding of digital tax? Explain the rationale for its introduction in India and discuss the challenges associated with its implementation. (200 words)
Model Answer Understanding Digital Tax and Its Rationale in India What is Digital Tax? Digital tax refers to taxes imposed on digital goods, services, or business activities conducted over the internet. In India, this tax is primarily aimed at non-resident digital companies that generate significantRead more
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Understanding Digital Tax and Its Rationale in India
What is Digital Tax?
Digital tax refers to taxes imposed on digital goods, services, or business activities conducted over the internet. In India, this tax is primarily aimed at non-resident digital companies that generate significant revenue from the Indian market, such as Google, Facebook, Amazon, and others. India introduced the Equalization Levy (EL) in 2016, a 6% tax on non-resident digital companies. This was expanded in 2020 to include a 2% Digital Service Tax (DST) on foreign e-commerce businesses with a turnover of over Rs. 2 crore annually (Source: Finance Act 2020).
Rationale for Introducing Digital Tax in India
Traditional tax laws were designed around brick-and-mortar businesses. The rise of digital services created a gap in tax regulations, leading India to introduce DST to better capture revenues from the digital economy (Source: Finance Act 2020).
The introduction of digital tax aligns with global efforts, like the OECD’s BEPS (Base Erosion and Profit Shifting) program, which seeks to reform international tax laws to ensure that digital companies pay taxes where they earn revenue (Source: OECD).
The digital tax ensures that foreign digital companies contribute to the Indian economy, creating a level playing field for both domestic and international businesses operating in India (Source: Government of India).
Challenges in Implementing Digital Tax
The United States has criticized India’s DST, claiming it discriminates against U.S.-based digital companies by excluding domestic companies. This has led to investigations and the threat of retaliatory tariffs, potentially escalating into a tax war (Source: U.S. Trade Representative).
Critics argue that the digital tax may be passed onto consumers in the form of higher prices for goods and services, defeating the purpose of targeting foreign companies (Source: Industry Experts).
International disputes over tax compliance and the absence of a unified dispute resolution mechanism complicate the effective enforcement of digital taxes (Source: OECD).
Developing nations like India have expressed concerns over global agreements that restrict their ability to enact future digital taxes, potentially undermining their sovereignty in tax matters (Source: Government of India).
To address these issues, coordinated global efforts and clear dispute resolution frameworks are essential for the successful implementation of digital tax.
See lessExamine the importance of green accounting and the obstacles faced in its execution within India.
Model Answer Importance of Green Accounting in India Better Policy-making and Sustainable Growth Fact: Green accounting enables informed policy decisions balancing economic growth with environmental conservation. Source: Ministry of Environment, Forest and Climate Change, India. Biodiversity ConservRead more
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Importance of Green Accounting in India
Better Policy-making and Sustainable Growth
Biodiversity Conservation
Promotes Innovation
Improved Quality of Life
Enhanced Corporate Social Responsibility
Access to Capital
Obstacles in Green Accounting Implementation in India
Developmental Imperatives
Lack of Reliable Data
Absence of Multisectoral Accounting
Additional Costs
Lack of Accountability
Efforts at various levels are crucial to establish effective policies and incentives for a universal green accounting system in India to ensure sustainable development and preserve natural resources for future generations.
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