Recently analysed data from CBDT published in The MINT shows that direct tax collection as a share of gross domestic product had reached an all-time high of 6.1% in FY 2023. The share of direct taxes as a proportion of overall tax revenue had reached 54.6 pc as against indirect tax collection of 45.4%. Interestingly between FY18 and FY23, corporate profit registered a CAGR of 17.6%. Even during the period of 2020-23, corporate profit CAGR at 34.3% was significantly higher than the GDP CAGR at 10.7%. On the contrary, corporate direct tax collection went down from a share of 61.6% in 2015 to 49.6%in FY 23. During the same period share of personal income tax in direct tax collection moved from 38.2% in 2015 to 50.4% in FY 2023

It was expected that the reduction in tax rates in 2019 would spur corporates to step up private investments and boost the economy. This has not happened and the government continues to shoulder the burden of investment leading to deleterious impact on India’s debt to GDP ratio which spiralled from 70% in 2018 to nearly 87% in 2023.

The tax reduction largesse resulted in corporate India resorting to accumulation of cash, deleveraging and buyback of shares instead of investing in fresh capacity building, to spur the economy. Thus, the intent behind the tax cut has been belied. This possibly stems from the fact that demand recovery continues to be uncertain and unutilized capacities exists.

It was also possibly expected that the reduction in tax rates would result in corporates passing on the benefits thru absorption of higher commodity cost and maintaining price stability. This too has not happened. On the contrary, corporates passed on the  higher input costs to consumers , focussed on maximising profits during the period of economic uncertainty    leading to high inflation in manufactured goods. Pharma products saw a huge price increase which have impacted the consumers severely in terms of higher healthcare outgo and consequently lesser disposable income.      

The combination of high inflation and reduced income with high income inequality in the economy has significantly impacted efforts at broad basing consumption recovery with the rural economy being severely hit. The muted sales volume growth of two wheelers, FMCG products, entry level cars, overall rural consumption and distress reflects the severity of the impact

For an economy dependent primarily on domestic consumption  ( about 55% of our GDP is contributed by private consumption ) this does not augur well for future economic growth and India’s ambition of becoming USD 5 Trillion by 2027 and 7 trillion by 2030 ( as recently forecasted by Niti Ayog chief ).

Another piece of recently released news item stated that the country’s largest  non-bank private sector consumer lender (Bajaj Finance) has reported 48% rise in non-performing assets in the quarter ended Dec2023  over the quarter ending  Dec 2022, with retail NPAs at Rs. 1248 Crores driven predominantly by the rural B2C business over the last two quarter. Even the urban B2C business witnessed lower collection efficiencies which adversely impacted credit cost.  It does indicate that the lender expects credit costs to remain elevated even in the last quarter of this fiscal.

These signs are ominous for the economy aspiring to hit USD 5Trillion and 7 trillion in the time frame the government has indicated and calls for structural changes in revenue raising by the government in the ensuing budget.  The government needs to accept that there is a severe rural and urban distress in the lower income bracket and that unemployment is pervasive. Moreover, the high debt to GDP does not give much leeway to the government in trying to borrow and fund investments and depending on only FDI may not help in achieving the economic goals.

Since private sector has not been keen to invest in fresh capacity building the government may think of raising corporate taxes and also impose wealth tax on the super-rich to fund welfare schemes, infrastructure investment and take measures for boosting and broad basing consumption. Else, India’s ambition to becoming the third largest economy in quick time will remain a chimera.

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