Model Answer
0 min readIntroduction
Domestic Resource Mobilization (DRM) refers to the collection of public resources – primarily taxes and non-tax revenues – within a country to finance public spending and investments. It is a cornerstone of sustainable economic growth, reducing reliance on external debt and fostering self-reliance. While India has witnessed significant economic progress in recent decades, its DRM remains constrained, hindering its potential for inclusive and rapid development. Despite improvements in tax collection, several systemic issues continue to limit the country’s ability to generate sufficient resources for its developmental needs, particularly in the context of ambitious goals like achieving a $5 trillion economy.
Constraints to Domestic Resource Mobilization in India
Despite economic liberalization and growth, India’s DRM faces several challenges. These can be broadly categorized as follows:
1. Narrow Tax Base & Low Tax Compliance
- Low Tax-to-GDP Ratio: India’s tax-to-GDP ratio, around 17.1% in FY23 (as per revised estimates), is lower than many comparable economies. This indicates a limited proportion of national income being contributed through taxes.
- Limited Taxpayer Base: A significant portion of the population remains outside the tax net. According to data from the Income Tax Department, only around 3.3 crore individuals filed Income Tax Returns in Assessment Year 2023-24.
- Tax Evasion & Avoidance: Widespread tax evasion, particularly among high-net-worth individuals and businesses, significantly reduces revenue collection.
2. Inefficiencies in Tax Administration
- Complex Tax System: The historically complex tax structure, though simplified with GST, still presents administrative challenges.
- Weak Enforcement: Inadequate enforcement mechanisms and a shortage of trained personnel hamper effective tax administration.
- Litigation: A large number of tax disputes remain unresolved, tying up significant revenue and administrative resources.
3. Reliance on Indirect Taxes
- Regressive Nature: A significant portion of government revenue comes from indirect taxes (GST, excise duties), which are regressive in nature, disproportionately affecting lower-income groups.
- Limited Revenue Elasticity: Indirect tax revenues are often less responsive to economic growth compared to direct taxes.
4. Limited Financial Inclusion & Formalization of the Economy
- Large Informal Sector: A substantial portion of the Indian economy operates in the informal sector, making it difficult to track economic activity and collect taxes.
- Low Bank Penetration: Limited access to banking services, particularly in rural areas, hinders financial inclusion and reduces the scope for tax collection.
- Digital Divide: Unequal access to digital infrastructure limits the effectiveness of online tax payment and compliance systems.
5. State Finances & Fiscal Imbalance
- Dependence on Central Transfers: Many states are heavily reliant on transfers from the central government, limiting their fiscal autonomy and ability to raise their own resources.
- Inefficient Revenue Collection by States: States often face challenges in effectively collecting taxes on land, property, and other state-level revenue sources.
The government has taken steps to address these constraints, including the introduction of GST, measures to curb black money, and initiatives to promote financial inclusion like Jan Dhan Yojana. However, sustained and comprehensive reforms are needed to unlock India’s full DRM potential.
Conclusion
In conclusion, while India’s economic growth story is impressive, its domestic resource mobilization remains hampered by a complex interplay of factors – a narrow tax base, administrative inefficiencies, reliance on indirect taxes, and the prevalence of the informal sector. Addressing these constraints requires a multi-pronged approach encompassing tax reforms, improved governance, financial inclusion, and formalization of the economy. Strengthening DRM is not merely a fiscal imperative but a crucial step towards achieving sustainable, inclusive, and equitable growth, enabling India to finance its developmental priorities and secure its future.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.