GDP growth: Headwinds in financial assets, tax filings hurt average Indian

A year ago, there was a sense of déjà vu when India overtook the UK as the fifth largest economy (in Q1 of FY23). Centre has promised to make India the third largest economy in the world in the next few years. A couple of months ago, both the NITI Aayog and the Centre claimed that 135 million had been lifted out of multidimensional poverty in six fiscals between FY16 and FY21. The first quarter of GDP numbers in the current fiscal (Q1 of FY24) show India grew at 7.8%.

The economy is surely growing, even if the GDP data is being questioned, but the average Indian is poorer, not prosperous. There are two official data pointing to this: Household financial assets and tax returns.

Household financial assets at 47-year low

On September 18, 2023, the RBI released data on financial health of households. It shows, net financial assets of households dropped sharply from 11.5% of the GDP in FY21 to 7.2% in FY22 and 5.1% in FY23. Going by the RBI’s database (since 1970-71), this fall to 5.1% in FY23 is a 47-year low. The last time it went below 5.1% was in 1975-76 when it was 4.7%; the next low was 5.2% in 1977-78.

This is a big fall. In 16 out of 18 fiscals between 1993-94 and 2010-11, net financial assets averaged 10.8%, peaking at 12% in FY10. After FY11, the only fiscal it touched double-digit was in FY21 (11.5%) – the pandemic fiscal in which the GDP growth plunged to -5.8% – and then dropped to 5.1% in FY23 when the GDP growth was 7.2%.

The fall in net financial assets is due to a sharp rise in financial liabilities. The latest RBI data shows, it fell from 3.9% of the GDP in FY21 to 3.9% in FY22 and went up to 5.8% in FY23. In the past 53 fiscals for which the RBI provides data (since 1970-71) only twice financial liabilities crossed 5% – 5.1% in FY06 and 6.6% in FY07.

It isn’t as if this is not known. Here are four more official data to demonstrate this.

(i) The NSSO’s 2017-18 household consumption expenditure survey (MPCE) showed a fall in ‘real’ expenditure – but it was junked on claims (that an experts committee questioned the data quality). No MPCE survey has been taken up thereafter.

(ii) The MoSPI data shows, net household savings (financial and physical assets) have fallen from 23.6% of the GDP in FY12 to 19.7% in FY22 (up to which data is available) and

(iii) Net physical assets have fallen from 16.3% to 12% during the same period.

(iv) The RBI data shows bank credit outflow inverted in FY20 – “personal loans” for consumption overtaking that to industry, large industry and services and continues to do so in FY24.

Tax base shrinks by 54% in seven years

Tax data too points to impoverishment of people in the lowest income group and a 54% fall in the taxbase in seven years between FY16 and FY23.

The Lok Sabha answer of July 24, 2023 (for FY20 to FY23) showed, the ITRs declaring taxable income (total ITRs filed 74 million minus 51.6 million ITRs showing zero tax liability) were 22.4 million (1.6% of population) in FY23. This is a sharp fall from 35.8 million in FY20 (pre-pandemic), 18.7 million in FY21 (pandemic) and 18.9 million in FY22 (partly impacted by the second wave). The impact of the pandemic and K-shaped recovery are obvious.

Going back to previous fiscals, the IT department’s annual data shows ITRs declaring taxable income (total ITRs of 49.5 million minus 0.91 million ITRs with zero tax liability) were 48.6 million (3.8% of population) in FY16 (pre-demonetization) and 48.9 million (3.8% of population) in FY17 (demonetisation fiscal). The impacts of the twin shocks of demonetisation and GST are obvious.

In all, the above tax data shows, there is a massive fall in ITRs declaring taxable income from FY16-FY17 to FY17 – by 53.9% or more than half!

Why did this happen? The obvious factors are the twin shocks, the pandemic and the K-shaped recovery. There is yet another factor. A sharp rise in ITRs declaring zero-tax liability – up from 29 million in FY20 to 51.6 million in FY23 (Lok Sabha answer). These numbers were 0.9 million in FY16 and FY17. The sharp rise in zero-tax is also due to the rise in taxable limits since 2019 (overall rise by ₹2 lakh over the previous UPA regime and would further rise to ₹2.5 lakh from FY24).

True, during the same period (FY16-FY23), the total number of ITRs including zero tax liability or taxpayers without taxable income has gone up from 49.5 million in FY16 to 74 million in FY23 – growth of 42%.

But this 74 million ITRs of FY23 also include 51.6 million ITRs with zero tax liability (taking the total ITRs declaring taxable income to 22.4 million). The net value of this 51.6 million from the view of tax payment is ‘zero'.

An analysis of total ITRs without zero tax liability but income group wise data (e-ITR), provide another aspect to the financial health of taxpayers.

The data for the past six fiscals of FY18-FY23 shows:

(i) Number of ITRs by the lowest income category (₹ 0-5 lakh) fell from 52.55 million in FY18 to 49.78 million in FY23. Average growth in their number is -0.4%.

(ii) In contrast, average growth for all higher income categories is positive: 5.4% for ₹5-10 lakh and 10.3-13.5% for over ₹10 lakh-over ₹1 crore.

(iii) As for percentage of population, ITR filed is stagnant – 5% in FY18, 4.9% each in FY19 and FY20, 5.3% in FY21, 4.6% in FY22 and 5.0% in FY23 (population data taken from the budget documents).

SBI’s 4 contrarian claims

However, SBI Research which analysed the total number of ITRs filed (from FY13 to FY22), has made four contrarian claims: (a) rise in “weighted mean income” (b) rise in tax efficiency (c) rise in tax buoyancy because of (a) and (d) transition “from lower income group to upper income group” because of (a).

About the rise in income, the SBI says: “Weighted mean income of ₹4.4 lakh in AY14 has increased to ₹13 lakh in AY23.” That is, the “weighted income” went up by 195.5% between FY13 and FY22 – a fantastic development to be proud of.

What is ‘weighted mean income”? The SBI uses three elements to calculate it: (i) income tax brackets (ii) number of ITRs filed in each bracket and (iii) ‘weight’ for each bracket is the “mid-point” of each bracket, except for the topmost bracket, for which it is ₹2 crore.

What it doesn’t consider though are the most critical for any such calculations:

The humongous number of ITRs with zero tax liability (zero tax paid). In FY23 alone (as per the LS reply of July 2023), such ITRs constitutes 51.6% of the total ITR. That is, 51.6% tax filers for FY23 paid no tax and declared they didn’t have the income to pay tax.

ITRs in the lowest income bracket (up to ₹5 lakh) constitute about 80% of the total ITRs (76.6% in FY23, for example). As mentioned earlier, the numbers of the ITRs in the lowest income bracket fell from 52.55 million in FY18 to 49.78 million in FY23 and average growth in their number was – (minus) 0.4%.

So, essentially, what the SBI report is telling is this: Sale of SUVs has witnessed quantum jump. What it isn’t telling: Sale of passenger cars (PVs) and two-wheelers has crashed at the same time! In other words, the income of the rich (fewer in number) is rising fast and that of the poor (masses) is going down equally fast or faster.

Regarding SBI’s other three claims. It doesn’t support with evidence other than the rising number of total ITRs and an estimate of “weighted” income.

However, tax efficiency and buoyancy have fallen – as per official data.

(a) Percentage of ITRs declaring taxable income has fallen from 3.8% of population in FY16 and FY17 to 1.6% in FY22. This means a sharp fall in tax efficiency.

(b) Budget documents show direct tax-to GDP is stagnant for 11 fiscals – from 5.6% in FY12 and FY13 to 6% each in FY21, FY22 and FY23 – another measure of tax efficiency.

(c) Tax buoyancy factor (ratio of growth in tax and growth in GDP) for direct tax was 2.52 in FY22 – a sudden jump from “nil” in FY21 (when growth in both tax and GDP was negative). It was less than 2 between FY09 to FY19 and negative (-1.2 in FY20) – having peaked at 2.59 in FY03. All these are from the IT data and doesn’t show tax buoyancy going up.

SBI’s fourth claim points to transition from low income to middle income. Had that been the case

(i) Taxbase would have expanded, not declined (ITRs declaring taxable income) or stagnated (ITRs with zero tax liabilities)

(ii) Direct tax-to-GDP and direct tax buoyancy would have gone up, not stagnated or fallen and

(iii) Gross tax-to-GDP would have gone up, not fallen from 11.2% each in FY17 and FY18 to 11.1% in FY23 and FY24 (BE) – as budget documents show.

As for lifting 135 million people out of multidimensional poverty during FY16-FY21, it is based on a single source health survey data of NFHS-5 of 2019-21 – without any data to measure two other components of multidimensional poverty – education and standard of living (due to data vacuum).

Both the fall in household assets and fall in people declaring taxable income mean less savings and less consumption demand and funds for future investment – which would adversely impact the growth potential. They need to be addressed.

High GDP growth giving misleading picture

High GDP growth and worsening household income are not incompatible or contradictory. It can be explained by the sharp rise in income inequality in India.

The latest slugfest is over 7.8% growth in Q1 of FY24. Economists like Arun Kumar and Ashoka Mody questioned it by drawing attention to unacceptably high discrepancy of 2.8% of GDP on the expenditure side. Arvind Subramanian and Josh Felman questioned the wide gap between headline inflation CPI and GDP deflator (India uses single deflation rather than international standard technique of double deflation) on the production/income side – pointing out that GDP deflator peaked at 11.6% in H1 of FY23 and then collapsed to 0.2% in Q1 of FY24 and asked “does this really correspond to our sense of inflation trends in the economy? The CPI was 4.6% in Q1 of FY24.

They all arrived at the same conclusion after taking into consideration various growth drivers like investment, exports and also imports (consumption demand): The GDP number for Q1 of FY24 (7.8%) is overestimated by about 3 percentage points. In the meanwhile, the government has said its crop yield is overestimated – leading to poor planning for imports and exports of agri commodities and sudden announcements of trade bans or restrictions.

This is something Subramanian had also found in 2019. Subramanian, who was the CEA during 2014-18 and during whose time the 2011-12 GDP series was introduced (in January 2015), compared the new GDP numbers with 17 high frequency indicators (because he said the underlying GDP data were not available publicly and hence, nobody outside the CSO could “estimate GDP”) to assert that the GDP growth was overestimated by 2.5-3.7 percentage points every year during 2011-12 and 2016-17.

The problem with the GDP data hasn’t gone away. The back series data was released only in November 2018 (nearly four years late). There have been repeated retrospective revisions in the numbers. Besides, the current GDP numbers are based on too old data:

(a) Informal economy contributes “about 50%” to the GDP but this was said in a 2012 report without specifying the year of assessment.

(b) Population data is 12 years old, economic census 9 years, MPCE, CPI, WPI and IIP data are 12 years and so on.

Prudence demands that existing data (tax, household assets) are studied, more data are collected or updated (Census, MPCE, CPI, WPI, IIP, informal sector survey etc.) to develop better understanding of ground realities and then devise appropriate plans and strategies to improving the living standards of people.