The National Statistical Office (NSO) released GDP numbers for the quarter ending March 2022 and provisional numbers for fiscal year 2021-22 on May 31.
The National Statistical Office (NSO) released GDP numbers for the quarter ending March 2022 and provisional numbers for fiscal year 2021-22 on May 31. On the same day, the Controller General of Accounts (CGA), which works under the ministry of finance, released provisional numbers for the union government’s fiscal position in 2021-22. Is there a larger macroeconomic message to be drawn from these numbers? Here are four charts which try to answer this question.
Representational image (Pradeep Gaur/Mint)
The external terms of trade shock to the Indian economy could get worse going forward.
India’s export numbers have been very bullish in the past few months. However, this has not led to trade-driven tailwinds for the economy because imports have risen at a faster pace. This can be seen from the fact that net exports as a share of GDP in the quarters ending December 2021 and March were -6% and -5%. This is the lowest since the quarter ending March 2013, when net exports share stood at -5.8%.
Among the biggest reason for this is a rise in the relative price of importable goods or what economists such as Sajjid Chinoy from JP Morgan have described as a worsening of external terms of trade.
A historical comparison of net export’s contribution to GDP with India’s average crude oil basket (COB) prices – oil prices drive the larger commodity cycle – shows that the two are inversely related. In fact, the trade deficit could have been higher had supply chain disruptions not led to a shortage of important inputs such as microchips. Given the fact that crude oil prices have risen further – India’s COB was priced at $ 115.9 per barrel on May 30 against an average of $ 97.2 per barrel in the quarter ending March – the trade account could worsen and generate headwinds for overall growth prospects going forward.
What has happened to tax buoyancy?
That higher than expected inflation has given a boost to the government’s tax collections is a widely accepted fact. As per provisional growth numbers released by NSO, nominal GDP growth in 2021-22 is 19.5%. This is five percentage points higher than what the 2021-22 Budget assumed. At ₹27.1 lakh crore, provisional Gross Tax Revenue (GTR) numbers are 22.1% higher than the Budget Estimates for 2021-22.
The key question to ask is whether inflation is the only reason for higher than expected GTR collections. The best way to answer this question is to look tax buoyancy – it is defined as the ratio of change in GTR and GDP – for 2021-22. At 0.18, tax buoyancy for 2021-22 is the highest in a decade. This shows that there is more to higher than expected revenue collections than just inflation.
A detailed look at tax numbers confirms a profit-led economic recovery…
To be sure, the tax buoyancy story is more complicated than what the headline numbers tell us. A look at disaggregated tax collection data shows that direct taxes, especially those on corporate profits have played a much bigger role in rise in revenue collection than indirect taxes. The biggest contribution has come from the growth in corporate tax collections, which have increased by 55% on annual basis. In fact, growth in corporate tax collections alone have a 37% contribution in overall increase in GTR in 2021-22. Because corporate tax is levied on company profits, this suggests a sharp increase in profit incomes. This is in keeping with the argument made by many independent economists that the post-pandemic recovery has been largely profit-led. The second largest contributor to growth in GTR collections are income tax proceeds, which suggests a healthy increase in white-collar incomes. Blue collar labour incomes, have likely been stagnant, as can be seen in the muted trend in rural wages.
… although corporate tax contribution to GDP remains below historical highs
While a sharp increase in corporate tax collections confirms a strong revival in corporate profits, it does not answer a fundamental political economy question. What has happened to the tax burden on corporate profits? The best way to answer this question is to look at the share of corporate tax collections in overall GDP. While the share of corporate tax collections in GDP has increased sharply from 2.3% in 2020-21 to 3% in 2021-22, it is still lower than historical levels. Data from Centre for Monitoring Indian Economy (CMIE) shows that this number was as high as 3.9% in 2010-11.
The biggest reason why the share of corporate tax collections has not reached its previous levels is the fact that the government reduced corporate tax rates in September 2019, slashing it for domestic manufacturers from 30% to 22%, while for new manufacturing companies, the rate was reduced from 25% to 15% provided they do not claim any exemptions.
The higher corporate tax collection also reflects the fact that bigger firms have enjoyed a better than average economic recovery, often at the cost of their smaller competitors.
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