Budget 2024: There is now a complicated link between GDP growth and tax revenue

 Budget 2024: There is now a complicated link between GDP growth and tax revenue

Budget 2024: There is now a complicated link between GDP growth and tax revenue

The Finance Ministry bases its estimates for tax revenue for the next year on its forecast for the nominal growth rate of the Indian economy. However, if 2023–24 is any indication, the two have a more complicated connection now, which might make it difficult to collect the data needed for the interim budget for 2024–25.

Although they may not increase at the same pace as the nominal GDP, government tax revenues do typically increase in the same direction.

On February 1, Nirmala Sitharaman will introduce the interim Budget 2024–25 in Parliament, bringing the Finance Ministry's week of labor to a close. Furthermore, even though this is simply a preliminary budget, when the final budget is released, the underlying numbers may not much alter. by the Lok Sabha election winner in July 2024.

The Finance Ministry's estimate of the rate of growth of the Indian economy in 2024–2025 is crucial for assessing these underlying figures. The issue is that there's never been greater complexity to this cerebral workout.

In order to budget, the government takes into account a figure for nominal GDP growth in the next year, which is GDP growth that is not adjusted for the rate of inflation. It then utilizes this figure to project the increase in tax receipts. Consider the updated estimate for 2022–2023 gross tax revenue growth of 10.4%, compared to the predicted nominal GDP growth of 10.5% in the 2023–2024 budget. The year did not go as the Finance Ministry had anticipated, which is the issue.

Given that India's nominal GDP grew by 22.2 percent from April to September of 2022, only 8.6 percent is predicted to rise in the first half of 2023–2024. As a result, many experts predict that the GDP will expand by less than 10.5 percent this year. The most recent figures for the months of April through November show that gross tax receipts have climbed by 14.7% so far, despite nominal growth that was less than anticipated.

The amount of gross taxes collected in 2022–2023 grew by 12.7%.

Although they don't always increase at the same pace as the nominal GDP, government tax revenues often follow the same path. However, as the above figure shows, nominal GDP growth saw a significant downturn in 2023–24, despite an increase in tax growth.

Under condition of anonymity, a senior finance ministry official said, "We are able to discern that the upside is higher if absolute GDP growth is less than 10.5% but tax collections are located in line with the budget estimate."

The ratio of the growth in tax revenues to the nominal GDP is known as tax buoyancy. For this reason, when tax receipts expand faster than nominal GDP, buoyancy is considered to be larger than 1.

a rise in the tax base

The data that is now available indicates that tax collections this year have been very strong, with a tax bounce of 1.7, which is much higher than the average of 1.2 in the five years before to the pandemic, from 2014–15 to 2018–19.

However, why is this year's tax spike so large? Economists and tax specialists claim that a significant portion of direct tax mobilization is driven by compliance. A more thorough explanation is needed for business tax receipts in this area, which increased by 20% from April to November of last year.

Corporate revenue has increased as a result of the decrease in input costs. In July-September 2023, the operational profit growth of private sector listed non-financial enterprises increased by over five times, from 5.3% to 26.2%, according per a study conducted by the Reserve Bank of India (RBI). This is contributing to a greater rise in corporate tax receipts than in nominal GDP growth, which helps to explain why the real GDP growth rate in Q2 2023–24 was 7.6%, lower than expected by most analysts and even the RBI. is much greater than.

Aditi Nair, chief economist at ICRA, estimates that the Center may receive around Rs 85,000 crore more in direct taxes in 2023–2024 than projected by the budget.

the evolution problem 

Figures for wholesale inflation also show the effect of this year's drop in input prices for businesses. The first eight months of 2023–24 had an average of -1.3 percent inflation based on the wholesale price index (WPI). Even while CPI increased to 0.26 percent in November, breaking out of the deflationary zone, and continued to rise in December and beyond, experts believe it will average less than 1 percent for the whole fiscal year.

But why is WPI inflation relevant in this context? WPI inflation comprises most of the GDP deflator, which is used to adjust nominal GDP to arrive at real growth, since its development is a crucial component in predicting nominal GDP growth for the year. Of course, everyone is aware of India's present problems with the GDP deflator; the government is now developing a producer price index.

However, there are also some problems with the way India calculates its nominal GDP. Chief Economic Advisor V Ananth Nageswaran had said that when tax burden is as high as it is now, "then it is quite possible that we will be measuring the actual index momentum and activity and dynamism of the economy." This was after the announcement of good July-September 2023 GDP statistics."We are not in the right place."

Authorities

 "These are real numbers," the chief U.S. economist had said. These are company-provided cash flow statements. It is worth contemplating that the economy could be expanding more rapidly than our measurements indicate."

What now for the government's budgetary calculations? Well, nobody will really be complaining as long as tax revenues are growing faster than expected.

The source from the finance ministry cited above said, "If the budget is being balanced around the estimate, we are good."

The discrepancy between nominal GDP growth and tax receipts, however, calls into doubt the accuracy of the budgetary estimates.