Vijay Kumar Gaba

Last Thursday, the finance minister presented an interim budget for the fiscal year 2024-25. The budget presentation had two part – (i) rhetorical and (ii) substantive.

The first part included a speech about the performance of the governments led by Prime Minister Narendra Modi for the past 10 years and promises for the next 23 years. The finance minister spoke about how in 2014 their government inherited an economy that was in shambles; and how they have pulled it out from a total mess and put it on the fast track to achieve the status of a developed nation by the year 2047; when we would celebrate 100 years of our independence from the colonial British rule. The finance minister also promised to implement a slew of development schemes over the next five years. She however refrained from listing any specifics or financial details.

The second part included (i) the accounts of the government for FY24; (ii) fiscal proposals for FY25, and (iii) a vote on account to meet the government’s expenses till a new government is formed and a full budget is approved by the parliament. This is the part that needs to be discussed and analyzed.

Fiscal prudence – achievement vs desirability

The finance minister presented that the fiscal deficit target for FY24 has been revised downward to 5.8% (Budget estimates (BE) 5.9%) and budgeted a fiscal deficit for FY25BE at 5.1% of GDP. She emphasized that the government is well on course to achieve the FRBMA target of a 4.5% fiscal deficit by FY26. The sharp improvement in the fiscal deficit has been received well by most. A tight balance is particularly commendable given the impending general elections. In my view, we need to ponder deeply over the following five points:

1.    At this stage of economic development, whether this degree of fiscal tightening is desirable? FY24RE shows that to meet the fiscal targets, the government has cut capex spending also. Is it appropriate to save on capital expenditure to meet fiscal targets? FY25BE growth in capex spend on key sectors is very moderate.

2.    FY25BE further confirms the trend of the past three years that the government is systematically cutting its consumption expenditure, subsidies, and social sector spending while allocating more for manufacturing and export incentives. Should investors assume that our economy is taking a left turn toward the Chinese model of growth (primarily manufacturing and infrastructure capacity building) from a largely consumption and social sector capacity building led growth?

3.    The budget does not explain why Rs one trillion, 50-year interest-free loan to states shall not be considered part of the fiscal deficit. For all practical purposes, it’s a drain on the center’s finances that will likely never be returned.

4.    Interest expense now constitutes 25% of the total government spending. There is no indication that this proportion will come down any time soon. On the contrary, with fiscal deficit staying at 4% of GDP or above for at least three more years, and greater reliance on high-cost small savings funding of deficit, it is likely that the proportion of interest in total expenditure may rise further. Under these circumstances, the sovereign rating of India may not see any upgrade anytime soon.

5.   With the current valuations of PSEs, disinvestment looks increasingly improbable. The government has not presented an alternative plan for fundraising so far.

…

The recently released Direct Tax Statistics by the Central Board of Direct Taxes (CBDT) shows that income taxpayers in India may not be a group of interest from a general election view point. For example, consider the following points evident from the said statistics:

No. of taxpayers: In AY23 only 8.91crore individuals paid some income tax (including TDS) in India. This is less than 10% of the total eligible voters in India. Though this year details have not been provided, from past year’s statistics it is clear that more than two thirds of these individuals have income less than Rs5.50 lacs, which is almost tax exempt. The population seeking income tax relief/incentive is about 2-3% of the voter base. This segment of the voters is also not particularly known for their commitment to voting.

Tax payer regional dispersion: During AY23, the government collected Rs8.26 trillion as corporate tax and Rs8.33 trillion as personal income tax. Four states (UP, Bihar, MP and West Bengal) which account for almost 40% of population accounted for only 7% of tax payment. Excluding NOIDA and Kolkata which may account for significant corporate tax, the personal income tax collections in these states would be of little relevance for elections.

Maharashtra with 9.5% population accounted for over 36.4% of tax collection. However, it would be interesting to see the picture excluding Greater Mumbai and Pune jurisdictions. Delhi accounted for 1.4% of population and 13.3% of tax collection.

The broader picture thus is that 50% tax collection happens from states having less than 10% population (that too mostly from 3 cities Delhi, Greater Mumbai and Pune) and 10% tax collection happens from states with over 40% population (including likely major contributions from NOIDA and Kolkata).

Direct Tax to GDP ratio highest: FY23 recorded a direct tax to GDP ratio of 6.11%, highest on record. Tax growth rate is consistently higher than the nominal GDP growth rate since FY17 (financial year 2015-16). FY22 witnessed the best tax buoyancy factor (tax growth to GDP growth) of 2.52 since FY03 (2.59).

Taxes growing faster than GDP: Between FY14 and FY23, direct tax collection has registered a growth of 11.2% CAGR, total tax collection has grown at 11.6% CAGR; whereas nominal GDP has grown at 10.2% CAGR only. Some part of higher tax collection could be attributed to enlargement of tax base; but the incidence of tax has also increased.

Trend to continue: The tax collection trends witnessed in the recent years are likely to persist in future also. There are about 66.3 crore PAN numbers allotted in India. Out of this presently only 8.91cr pay tax (including TDS) and 7.4cr people file income tax return. The administrative effort is to bring more PAN allottees to the tax net. The share of TDS in total tax collection has increased from 34.4% in FY14 to 41.5% in FY23. This shall also increase in future.

In short, if you are a taxpayer and hoping for any favor from the finance minister today, you might be disappointed.