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(a) Explain the importance of Public debt in India.

(b) Mention three merits and two demerits of indirect taxes.

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(a) Importance of Public Debt in India: 

1. Covering the gap between expenditure and Tax Revenue: If the Govemment’s revenue from taxes falls short of expenditure, public borrowings becomes a necessity. The excess of Government expenditure over its revenue creates a deficit in the Government Budget. The growing deficit in the Government budget has been the principal reason for public borrowings in India. 

2. Controlling Inflation: At times of inflation, the Government tries to reduce the purchasing power of consumers, so that the pressure of excess demand may be reduced. Like taxes, public debt also takes money away from people’s hand. Hence, public debt is used, side by side with taxes, as an instrument of inflation control. 

3. Controlling recessions: During recessions, people do not want to invest their money. As a result, the levels of output and employment are stagnant. The Government may borrow money from the public and invest the money in various projects. 

4. Development financing: In a less developed economy like India, the Government often has to play a leading role in economic development. For raising the necessary funds, the Government takes recourse to borrowing from public. In India, public debt has been the major source of financing the development plans. 

5. Social development: Financing is needed not only for economic but also for social development projects like education, health care etc. For this purpose also, the Government borrows from the public. 

(b) Merits of Indirect taxes: 

1. Broad Coverage: When a sales tax is imposed on a commodity, all buyers of the commodity ultimately have to pay a higher price. Hence, all consumers, irrespective of whether they are rich or poor, pay tax under this system. For this reason, it is said that indirect taxes have a broader coverage than direct taxes. 

2. Not unpopular: Indirect taxes are taxes in the dark. When a common man purchases a commodity in the market, he considers the tax inclusive price to be the price of the commodity. In other words, he is not often aware that he is paying a tax. As a result, indirect taxes are not as unpopular as direct taxes. 

3. Regulate Consumption: Indirect taxes at stiff rates can be imposed on commodities whose consumption is judged to be socially harmful (for instance liquor, drugs etc.). The prices of these commodities will then increase and the consumers will buy less of them. 

Demerits of Indirect Taxes: 

1. Not always equitable: As both the rich and the poor pay indirect taxes at the same rate, the indirect taxes often tend to be regressive. Since a poor person earns less than a rich one, the proportional tax burden on the poor is greater than that on the rich when they pay the same absolute amount in taxes. 

2. Inelasticity: Indirect taxes are less elastic than direct taxes. When an indirect tax is imposed, the Government’s revenue does not go up very much because the tax will increase the price of the commodity and the quantity transacted in the market will, therefore, decline.

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