The correct option is 1 and 3 only.
Explanation
Fiscal Consolidation refers to the policies undertaken by the government to reduce deficits and accumulation of debt. The two primary strategies for deficit reduction are Revenue Augmentation (increasing tax and non-tax receipts) and Expenditure Rationalization (reducing unnecessary public spending).
Statement-wise Analysis
- Statement 1 is Correct: While the long-term goal of fiscal reforms in India has been to increase the share of direct taxes to improve equity, governments have frequently relied on indirect taxes (such as GST, excise duties on fuel, etc.) to mobilize revenue quickly for deficit reduction. Indirect taxes are often easier to collect and have a wider base compared to direct taxes in a developing economy, making them a go-to tool for immediate revenue generation during fiscal pressure.
- Statement 2 is Incorrect: Indirect taxes are considered regressive in nature, not progressive. A progressive tax system imposes a higher tax rate on those with higher incomes (e.g., Income Tax). In contrast, indirect taxes (like GST) are levied uniformly on goods and services. Consequently, a poor person pays the same amount of tax on a commodity as a rich person, which consumes a larger proportion of the poor person's income.
- Statement 3 is Correct: Reducing government expenditure is a fundamental component of deficit reduction strategies. This involves expenditure rationalization, such as reducing subsidies, controlling administrative costs, and targeting welfare schemes more effectively to minimize leakage. The Fiscal Responsibility and Budget Management (FRBM) Act also emphasizes the management of expenditure to achieve fiscal targets.
Key Takeaway
Indirect taxes are regressive because the tax burden falls indiscriminately on all income groups, whereas direct taxes are progressive. Fiscal consolidation relies on a mix of increasing tax revenue and rationalizing public expenditure.