It’s the economy, stupid! Continuity with a side of reform
We love IndiaDataHub’s weekly newsletter, ‘This Week in Data’, which neatly wraps up all major macro data stories for the week. We love it so much, in fact, that we’ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don’t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to IndiaDataHub. All mistakes, of course, are our own.
A Budget for continuity
A couple of weeks ago, we wondered if the government’s Budget priorities would change, now that it was run by a coalition. Specifically, we thought there was an off-chance it would try loading up on politically attractive short-term expenses — either with borrowed money, running up its ‘fiscal deficit’, or by cutting down the money it allocates for its long-term ‘capital expenses’.
Thankfully, that didn’t come to be. At least this time around.
Instead, the budget was… really responsible? The government actually brought down its fiscal deficit target, to 4.9% of the GDP — 0.2% lower than the interim budget delivered less than six months ago. And this wasn’t just for appearances. The government isn’t simply inflating what it thinks it’ll earn this year and pretending to be in good financial shape; in fact, it’s made fairly reasonable assumptions for the revenues it’ll earn this year. If we maintain our current rate of growth, the government might actually make more tax money than it’s currently projecting.
At the same time, the amount it set aside for capital expenditure is the same as it did in the interim budget. That’s 17% more than last year. Compare that to the mere 6% increase in what it budgeted for short-term ‘revenue expenditure’. Clearly, little has changed. This Budget signals continuity from the last iteration of the Lok Sabha.
Now, if the government is bringing down its fiscal deficit, it basically plans to borrow less.
It looks like its market borrowings will come down ~10% from what it projected in its interim budget, and from what it actually borrowed last year. This is great. Governments have a bad habit of ‘crowding out’ everyone else when they borrow, taking up so much of the available money that it becomes harder (and more expensive) for everyone else to borrow any. This is a particularly big risk right now, with banks barely having any money to loan out.
If the government cuts down on its borrowing, going ahead, there’ll probably be some more money in the system for private borrowers to dig into.
Stealthy reforms
Here’s some fantastic news that nobody is talking about.
You know how middle class tax-payers keep complaining about how most other Indians don’t pay their fair share of taxes? Annoying as that is, it really is a big problem. India’s income tax collections are unusually low: partly because even the lowest tax bracket is higher than what most Indians make, partly because of other things.
In the short-term, it’s really convenient for a politician to pull up the lowest tax bracket whenever you’re under some pressure — what do voters like more than not paying taxes, after all? But this distorts our entire fiscal system. In effect, it passes the bill for the government’s normal functioning to a tiny set of people. The way these incentives work, moreover, the point at which you have to start paying taxes — the ‘tax exemption limit‘ — can only shift upwards. Lowering the limit is political suicide.
An unsung achievement of this government, but a big one nonetheless, is to fight this political urge. The last time it increased the tax exemption limit was ten years ago, in the 2014 post-election budget. If you come under the old tax regime, the tax exemption limit is still where it was set all those years ago — i.e., when your income hits ₹2.5 lakhs. If you’ve opted for the new regime, you need to start paying taxes once you earn ₹3 lakhs.
But that’s not all, is it? The limit has been kept the same yes, but in the meanwhile, inflation has been eating away at its value. Since 2014, we’ve faced an average of 5% inflation. Things cost 65% more than they did when these slabs were decided. So, while you’ve to start paying taxes at an income of ₹2.5/3 lakhs, that money means a lot less than it did in 2014. In real terms, the tax exemption limit has actually come down.
This effect is evident from the graphs above. As a country, we’re paying more income tax than ever. In the decade between Fiscals 2015 and 2025, income tax collections grew from 2% of our GDP to 3.6% — a difference of 1.6%. For context, it had grown by just 1% in the preceding 35 years.
With this, the burden of paying taxes is slowly shifting away from corporations to individuals. In Fiscal 2015, we were in a trough, with income tax collections 40% lower than corporate tax collections. This year, income tax collections are 15% higher than corporate tax collections. This is the best ratio we’ve had in decades (except for the single year of Fiscal 1998, when a tax amnesty scheme drove up collections.)
The number of people paying their taxes has also gone up. We have data for upto Fiscal 2022, when almost 9 crore people paid their taxes (or filed their income tax returns, at least). This number had gone up 25% since 2017. By now, India almost certainly has over 10 crore tax payers. That’s over 10% of Indian adults, and more than 15% of India’s workforce.
This is a substantial improvement in India’s fiscal health. And it didn’t come from the government doing something: it came from the government holding itself back from increasing tax exemptions. Funny, huh?
The US economy chugs along just fine
We have the first advance estimates for how much the GDP of the United States went up in the first quarter of June 2024. The result: its Real GDP grew at 2.8% between the quarters. That’s well over its 1.4% growth in the March quarter, and rather better than its average growth over the last few quarters. For all the unending drama, if you zoom out, things are chugging along just fine in the richest country in the world.
That’s all for the week, folks!
