Immediate analyses of the Union Budget are always focused on the headline numbers which the document contains. While these numbers are important , it is essential to take a big picture view of the economy to examine the validity of the budget’s larger premise. Such an exercise is best conducted by putting statistics within and outside the budget in a larger context. Here are three questions which try to do this.
How serious is India’s consumption demand challenge?
By prioritizing long-term growth via a capital spending push, the budget has underplayed the need for urgent steps to boost short-term consumption demand.
An important statistic which was released a day before the Budget was presented, and therefore did not get as much attention as it should have, was a further downgrading of India’s GDP growth in 2019-20 from 4% to 3.7%. This underlines the importance of realising that just achieving pre-pandemic levels is going to be of little help for the economy. How did India’s pre-pandemic slowdown affect private demand? The answer to this question is important because there was hardly any official acknowledgement of a demand-side problem in the economy before the pandemic struck.
The National Statistical Office (NSO) release which gave the first and second revised estimates of GDP for 2020-21 and 2019-20 also gives a detailed break-up of private final consumption expenditure (PFCE) from 2011-12. A comparison of compound annual growth rate (CAGR) of various PFCE sub-components in the pre- and post -demonetisation period – a lot of independent economists believe that demonetisation marked the beginning of a squeeze on the informal sector and contributed to the economic slowdown – shows that the post-demonetisation phase saw a deceleration in spending growth on everything except non-durable goods. Statistics given in the same document also suggest that the consumption demand of the rich did not suffer as much as the poor. Growth in final consumption expenditure of resident households in “rest of the world” (as it is defined)– this includes spending on things such as foreign holidays and imported consumer goods and is largely undertaken by the rich – actually increased in the post-demonetisation period. These numbers show that India’s consumption demand has been facing major headwinds because of weakness in purchasing power of the poor. To be sure, there is no way of accepting or rejecting these deductive arguments because NSO has not released a Consumption Expenditure Survey after 2011-12.
{{/usCountry}}The National Statistical Office (NSO) release which gave the first and second revised estimates of GDP for 2020-21 and 2019-20 also gives a detailed break-up of private final consumption expenditure (PFCE) from 2011-12. A comparison of compound annual growth rate (CAGR) of various PFCE sub-components in the pre- and post -demonetisation period – a lot of independent economists believe that demonetisation marked the beginning of a squeeze on the informal sector and contributed to the economic slowdown – shows that the post-demonetisation phase saw a deceleration in spending growth on everything except non-durable goods. Statistics given in the same document also suggest that the consumption demand of the rich did not suffer as much as the poor. Growth in final consumption expenditure of resident households in “rest of the world” (as it is defined)– this includes spending on things such as foreign holidays and imported consumer goods and is largely undertaken by the rich – actually increased in the post-demonetisation period. These numbers show that India’s consumption demand has been facing major headwinds because of weakness in purchasing power of the poor. To be sure, there is no way of accepting or rejecting these deductive arguments because NSO has not released a Consumption Expenditure Survey after 2011-12.
{{/usCountry}}Does an increase in corporate profits mean we can except higher private investments?
The sharp rise in corporate tax collections – they are a fraction of corporate profits – in this year’s budget suggests that businesses have the material ability to undertake higher investment. It is current or expected profits which finance investments. This is good news for the government. The budget is hoping to exploit an improvement in business sentiment to crowd in private investment via public investment. This, it believes will eventually give a boost to growth.
This line of reasoning needs to be read with a caveat though. Corporate tax collections, just like their income tax counterpart, capture a very small universe of Indian companies. This is because a handful of companies in India have a very large share in corporate profits.
Data given in the Annexure 7 of the Receipts Budget brings this out clearly. It shows that in 2019-20, just 433 companies (0.05% of the 9.2 lakh companies which filed tax returns) accounted for more than half of total corporate tax liability. A lot of commentary in the post-pandemic period has highlighted the fact that larger firms have gained at the cost of smaller businesses. This suggests that an increase in corporate tax collections need not mean a general improvement in business incomes and therefore investment, more so for smaller firms. In fact, work by Austrian economist Josef Steindl – his 1952 book Maturity and Stagnation in American Capitalism is a classic – argues that increase in business concentration generates a tendency for underinvestment as competitive reasons for investment decline in importance.
What about ease of doing business?
The current government takes a lot of pride in its focus on improving the ease of doing business. With the World Bank discontinuing the publication of Ease of Doing Business Rankings, we will not know about India’s international progress on this front. However, there is one set of statistics in the budget documents which suggests that the ease of doing business might have suffered during this government’s second term. Annex 5 of the Receipts Budget gives information about the amount of taxes which have been raised but not realized. The budget divides this amount into two heads: amount under dispute and amount not under dispute. The latter is on account of reasons such as no assets or inadequate asset for recovery, assessee not traceable, etc. This is a stock value and it also includes disputes carried forward from previous years.
A long-term comparison of the share of taxes raised but not realized in gross tax revenue shows that this number has increased sharply in the last few years and reached 80% of total gross tax revenue in 2020-21, the period for which this information is given in this year’s budget. This number was actually declining in the first term of the current government. While the share of disputed demands in the total value of taxes raised but not realized has fallen from 80% to 75% in 2020-21, it is still very high compared to past standards. An increase in conflict between the government and tax payers, especially when seen against repeated government claims of the tax-filing process being made user friendly is not a good sign for ease of doing business in the Indian economy. This is bound to scare potential investors.