Does Modi govt deserve credit for tax effort? It’s really nothing to crow about

Representational image | PM Modi | PTI

The government’s Interim Budget has been trumpeted for showing an improvement in its taxation effort. The truth is rather different.

The share of central government taxes in national income since the Bharatiya Janata Party government was elected in 2014 will have risen modestly from 10 per cent to 11.6 per cent, even if the government’s estimates of tax collections for the current fiscal year are completely borne out. This is hardly a stellar record. Between 2001 and 2007, the tax-to-GDP ratio rose steadily, reaching a high of 12.1 per cent, and declined thereafter, only recovering partially since then. The current level of tax revenue is not much higher than the average of 11.8 per cent for all lower middle-income countries (last reported by the World Bank in 2015) and beneath the level of nations such as Tunisia (20.1 per cent), El Salvador (19.4 per cent), Senegal (18.7 per cent), Nepal (17.5 per cent), Zambia (16.8 per cent), Cambodia (16.4 per cent), the Philippines (14.6 per cent), Kenya (13.3 per cent) or Egypt (12.5 per cent). The average level for high-income countries is 16.2 per cent (more than a third if taxes at all levels of government are included).

In short, the tax take is nothing to crow about, either in terms of its trend of improvement or comparisons with other countries. Of course, what the optimal tax-to-GDP ratio is can be debated, but the prevailing premise is that for emerging economies (which include India) a higher ratio is desirable to finance needed developmental expenditures and to reduce the risks that arise from running large fiscal deficits.

Does the Modi govt deserve credit?

If absolute government expenditures in specific areas have noticeably increased, it is more due to the growth of the national economy than the share of the tax take. But India’s robust growth trajectory did not begin recently. Widely accepted figures show an annual growth rate averaging over 6 per cent over three decades, with no clearly identifiable rate of increase over this period (indeed, since 2014, the rate of growth has been lower, averaging 5.7 per cent). The government therefore cannot claim special credit for increasing the government revenues that are available to spend on ‘transforming India’; any government that did not disrupt the growth process already underway in the country and did not worsen the tax take would have had similar success in mobilising resources.

Government expenditures on specific areas, such as health and education, have risen modestly, but this increase was also well underway already. Government expenditures on education as a share of GDP have been growing, after a prior dip, since at least 2006, but have only recently exceeded the earlier high reached in 1999. The latest available authoritative estimates on total government health spending as a share of national income show only modest increases, although budgeted health expenditures have shown an intention to raise them further. High-profile social welfare programmes, especially those linked to the delivery of social services, have benefitted from absolute increases in expenditure in many (but certainly not all) cases. These increases reflect the growth in national income, as well as government choices, and have undoubtedly led to improvements in aspects of life.

Any govt would spend on social welfare

Are the improvements that have been achieved, despite the modest increase in government revenues as a share of national income, an achievement for which the current government deserves particular credit? There is one big reason to think not. This has to do with how India’s ‘political economy’ has changed, creating incentives for any government to spend its available resources in a similar way. Contrasting two facts helps us to see why.

First, India’s urbanisation has been very slow by global standards. Sixty-four per cent of its population still lives in rural areas (down from 82 per cent in 1960), which contrasts with 36 per cent in China today and 48 per cent in low-and-middle-income countries combined.  The share of agricultural work in employment in the country is also still high; around 45 per cent.

Second, the role of urban sources of income in the Indian economy has risen sharply. The share of agriculture in national income has declined dramatically to less than 15 per cent, down from 35 per cent in 1990.  Although the role of non-agricultural income in rural areas has been growing, agricultural incomes continue to be central to the rural economy.  Unsurprisingly, therefore, per-capita incomes in urban areas are now more than double those in rural areas.

These two facts when taken together give us a clear idea of why any government would increase the emphasis on social welfare schemes. The votes lie disproportionately in rural areas but the income is disproportionately concentrated in urban areas. As national income has grown, this pattern has become ever more pronounced. Whether the focus is on cash transfer programmes that have been characterised as ‘freebies’ or on the social service delivery programmes branded with the Prime Minister’s image and promoted by the government, the political logic is similar. Electoral success requires resources to be spent in ways that are seen to be benefitting the majority of voters where they live. Both the BJP’s political platform and those of the parties that have been successful in opposition-ruled states reflect an effort to spend government resources on winning votes (such an appeal has notably underpinned the recent Congress victories in Karnataka and Telangana).

The emphasis on specific programmes certainly differs across parties. Whether these programmes ought to be the focus and whether some governments have been more effective at running them can both be debated. But however much the government may seek to brand its social programmes as a unique feature of its ‘Modi ki guarantee’, deserving special credit, the adoption of such programmes was to be expected in today’s Indian political conditions – by any government. The reasons, which relate both to politics and to needed investments in India’s people, go beyond any one personality and party. That much is a guarantee.

The author is an Economist at the New School for Social Research, New York. Follow him on X @sanjaygreddy. Views are personal.

(Edited by Zoya Bhatti)