August tax data, core sector show economy is in fine fettle

Two pieces of data that came out on the last working day of the half year, indicate that Indian economy is growing in top gear: 1. The growth in taxes in August in particular and in April- August in general and 2. The growth in the core sector in August.

Some experts point out correctly that the CGA website had mentioned in July that there is an unreconciled amount of Rs 76,046 crore, which has probably gotten reconciled in August. So let us stick with only the April-August numbers and compare them year-on-year. Even these show strong growth.:

Direct taxes are up 26.6 percent for the April-August period- with income tax growing by 35.7 percent and corporate income tax growing by 15.1 percent. There are a couple of long term positives to note here. Overall tax growth is higher than growth in nominal GDP indicating higher growth in the formal sector. Particularly impressive is the nearly 36 percent growth in income tax at a time when nominal GDP is at best growing by 10-11 percent.

This means the tax collecting machinery has clearly become more effective. Tax experts have been pointing out that the GST systematically brings more people into the tax net. This doesn’t just increase GST collections. What it does is that people who were doing business outside the tax net and have now moved into the tax net, are forced to declare all or most of their income and hence income tax goes up.

The April-July tax numbers had led many economists to worry that the government may slip on fiscal deficit since taxes were growing by only 2.8 percent. That fear is now put to rest. More important, the August numbers also show that the economy is growing robustly and consumption ought to pick up as incomes have grown handsomely.

Another positive in the fiscal data is the continued strong growth in capital expenditure. April-August Capex is up 48 percent and it appears the government will meet its budgeted capex substantially , if not entirely.

From point of view of equity too, the April-August fiscal data is satisfying as direct tax collections stand at Rs 6 trillion, a shade higher than indirect tax collections at Rs 5.9 trillion. In FY21 and FY22, indirect taxes were running higher than direct tax collections which is a sign of a regressive system ( since indirect taxes apply equally on the rich and poor while direct taxes fall more on the rich). That this regressive tilt is getting corrected, albeit only slightly is a good sign.

The other shining economic data that was announced on Friday was the August core sector data. the eight core sectors – power, steel, cement, coal, gas, crude oil, refinery products and fertilisers- grew by a whopping 12.1 percent, the highest in 14 months. Within these, super growth came form electricity (14.9 percent), coal (17.8 percent), cement (18.9 percent), steel (10.9 percent),refinery products (9.5 percent) and natural gas ( 10 percent).

At the start of this fiscal, when the RBI forecast a 6.5 percent GDP growth for the current year, the number was greeted with scepticism, with most economists forecasting that FY24 GDP may end up lower than 6 percent. But now, when the RBI will lay out its mid year Monetary Policy Review on October 6, it may well raise its GDP forecast or at least add an upward bias to it.