In 2009, an Asian Development Bank report (ADB, 2009) suggested that given a few prerequisites, India could achieve high income status (at 2007 prices) within the next 30 years. It is now known that from 2003–04 to 2011–12 India's GDP grew at an unprecedented 8.4 per cent per annum despite the fact that the global economy went into severe recession starting 2008. India also achieved ‘low-middle income’ status in the World Bank lexicon (after remaining a ‘low-income’ country for 60 years) in 2007. It has been argued in earlier chapters (especially chapter 1, 3 and 4) that sustained GDP growth is likely only if it is inclusive growth, with a growing domestic market (possible only with falling income poverty) and improving human capital.

In this chapter we present the argument that public finance reform is a critical dimension of the governance reform that will underpin the Indian economy's ability to achieve inclusive growth. This argument is based on a historical basis, drawn from international experience, presented in section 5.1. We also compare trends for India with other countries in respect to tax to GDP ratio and show why and how tax-to-GDP rose in the now industrialised countries over 1880–1980, as income grows. Section 5.2 examines tax reforms since 1991, the year broad economic reforms began in India, which shows that tax-to-GDP ratio barely rose over the quarter century since economic reforms began, despite rising per capita incomes. Section 5.3 then turns to the main focus of this chapter, mobilising additional resources through taxes. Section 5.4 examines the potential for additional revenues that could be generated from non-tax sources.

Generating Revenues to Enable Pro-poor Expenditures

Historical evidence on tax and expenditure share in GDP and trends in India

Chapter 1 shows that the role of the state in human capital formation and improving human well-being is critical. The ability of the state to spend on enhancing human functionings (by investing in education and health) and direct measures to reduce income-poverty (for example, by expanding coverage of the population with oldage pension or death/disabilaty insurance) is directly dependent on its tax to GDP ratio.