Two pieces of data out on the last working day of the half-year indicate that the Indian economy is growing in top gear: 1. Tax growth in August in particular and April-August in general and 2. Growth in key sectors in August.
Direct taxes increased by 26.6 percent during the April-August period—income tax by 35.7 percent and corporate income tax by 15.1 percent. There are some long-term positives to note here. Gross tax growth is higher than nominal GDP growth, indicating higher growth in the formal sector. The nearly 36 percent growth in income tax is particularly impressive at a time when nominal GDP is growing at 10-11 percent.
This means that the tax collection machinery has clearly become more effective. Tax experts point out that GST is planned to bring more people into the tax net. It will not only increase GST collection. What that means is that people who have done business outside the tax net and now enter the tax net are forced to declare all or most of their income, hence increasing income tax.
The April-July tax numbers have led many economists to worry that the government could slip into a fiscal deficit, with taxes rising just 2.8 percent. That fear has now been put to rest. More importantly, the August numbers show that the economy is growing strongly and that consumption should pick up as incomes grow nicely.
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Another positive in the financial data is the continued strong growth in capital expenditure. April-August capex rose 48 per cent and the government appears likely to meet its budgetary capex significantly.
From an equity perspective, the April-August financial data is satisfactory as direct tax collections stood at Rs. 6 trillion, which translates into an indirect tax collection of Rs.5.9 trillion. In FY21 and FY22, indirect taxes were running higher than direct tax collections, a sign of a regressive system (indirect taxes apply equally to the rich and poor while direct taxes fall heavily on the rich). A good sign is that this retracement has corrected slightly.
The other bright economic data reported on Friday was key sector data for August. Eight major sectors — power, steel, cement, coal, gas, crude oil, refined products and fertilizers — grew at a 14-month high of 12.1 percent. Among these, super growth has occurred in power (14.9 per cent), coal (17.8 per cent), cement (18.9 per cent), steel (10.9 per cent), refined products (9.5 per cent) and natural gas (10 per cent).
Earlier this fiscal, when the RBI projected GDP growth for the current year at 6.5 percent, the figure was greeted with skepticism, with most economists predicting FY24 GDP to end below 6 percent. But now, when the Reserve Bank releases its mid-year fiscal policy review on October 6, it may raise its GDP forecast or at least add an upward bias.
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