Number Theory: Ten years of Modi government and the Indian economy – II

The second part of this data journalism series looks at the nature of fiscal policy, dynamics in the financial sector and the level of confidence in the economy

The second Narendra Modi government will present its last budget, albeit an interim one, on Thursday. How has this government performed on the economic front in the last 10 years? The first part of this two-part data journalism series looked at growth, employment and inflation data during this period. While these are the most critical aspects of an economy, a holistic economic analysis requires going beyond those numbers. In the concluding part of this series, we look at the nature

The Modi government will present its last budget, albeit an interim one, on Thursday.

Ten years of Modi government and the Indian economy – II

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  Tax burden is becoming progressive once again, but salary earners are leading the change

  Tax collections are the most important resource for a government in any economy. This also makes it necessary to look at how the government collects its taxes. Because direct taxes such as those on incomes and profits are progressive in nature – those with higher incomes pay higher taxes – a bigger share of direct taxes in the overall tax revenue is seen as a sign of the fiscal policy being progressive. A bigger share of indirect taxes means that fiscal policy is taxing the poor more than the rich. A historical analysis of the central government’s gross tax revenue shows that the share of direct taxes increased almost consistently till the global financial crisis of 2008. This number started falling in the period after that, and went below the share of indirect taxes after a decade in 2016-17. After fluctuating for a while, direct taxes are believed to have overtaken indirect taxes in the gross tax revenue in 2022-23 (revised estimates) and 2023-24 (budget estimates). While this in itself is a welcome sign, there has been a change in the nature of direct tax collections during the last few years with income tax contributing a bigger share than corporate taxes, which means that salary earners rather than corporates are bearing a relatively bigger burden of rise in direct taxes. It needs to be remembered that the Modi government slashed corporate tax rates in September 2019.
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  The government has also reduced the subsidy flow to the middle classes

  Subsidies are an important component of the central government’s spending in India. According to the 2023-24 Union Budget, subsidies accounted for 7% of the total spending. A long-term analysis of the central government’s subsidy burden using data from the Centre for Monitoring Indian Economy shows that the second Modi government spent a greater amount on food and fertilizer subsidies as a share of GDP than it did in its first term, but managed to keep the overall subsidy bill lower than what it was during the UPA period by almost eradicating any spending on petroleum subsidy. In a way, this can be described as better targeting of subsidies as food and fertilizer subsidies go mostly to the poor, unlike petroleum subsidies which also benefit the middle classes.
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  None of this has weakened the middle class’s economic sentiment

  Unit-level data from the latest round of RBI’s Consumer Confidence Survey (CCS) shows this clearly. This data, which is available on the RBI website, allows us to look at responses to various questions in the CCS by different income categories. The data clearly underlines what many commentators have been calling the K-shaped recovery in the Indian economy. The share of respondents who believe that the general economic situation in the country has improved as compared to a year ago increases with rising income levels. The relationship is exactly the opposite when it comes to respondents who believe that the situation has worsened compared to a year ago.
• Will a middle-class borrowing binge undo gains on the financial stability front?

  There is widespread consensus that a sustained growth revival will require a rejuvenation of the private investment cycle in the Indian economy. While there are some signs of this happening, the trend is far from conclusive at the moment. The rebuilding of bank balance sheets, as seen in non-performing assets (NPAs) falling to just 3.2% (of total advances) in September 2023 from a peak of 11.2% in 2017-18, is the biggest factor which has made this investment revival even possible. However, a breakdown of non-food credit data shows that personal loans are increasingly becoming a big driver of credit growth, and their share in total credit has increased by almost 10 percentage points during the term of the second Modi government. While there are no red flags yet in terms of stress levels in personal loans, RBI has been calling for vigilance on this trend. “Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress”, RBI governor Shaktikanta Das said in his statement after the October 2023 Monetary Policy Meeting. If the middle class’s beliefs about its future income prospects are belied, both growth and financial stability may come under threat in the future.