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Data show income growth ahead of inflation

Source : BUSINESS_STANDARD
Last Updated: Sun, Feb 24, 2013 21:50 hrs
A labourer carries a packed basket of vegetables as a vendor waits for customers at his vegetables stall at a market in Kolkata

Personal disposable income (PDI) in India grew by 15-21 per cent in nominal terms a year between 2008-09 and 2011-12, even as demand increases for raising the income tax (I-T) exemption level in the coming Union Budget.

PDI is what one has after deducting all direct taxes and mandatory deductions such as for the provident fund. Per capita PDI expanded 13-20 per cent a year at current prices in this period, higher than the inflation rates in these years, Central Statistics Office data showed.

Even then, India's savings rate declined considerably, below even the falling investment rate, leading to a record current account deficit (CAD) of 4.2 per cent in 2011-12. In fact, investment rate has also been refusing to perk up at a significant level and the main purpose behind raising disposable income is precisely to create demand to raise capital formation. In case capital formation does not take place at a significant pace, more demand will only add to further inflationary pressures, analysts said.

In the light of these facts, a contrarian query may be posed as to why should threshold for personal income taxation be raised from Rs two lakh a year, when it is not leading to desirable effects on the economy?

PDI (nominal terms) rose 21.3 per cent in 2008-09, the highest during the period under review. Per capita PDI expanded 19.6 per cent in the year. The reason is that as signs of the global financial crisis were visible at the beginning of 2008-09 in the form of the sub-prime crisis, then Finance Minister P Chidambaram raised the exemption limit for personal I-T from Rs 110,000 to Rs 150,000 a year.

The next year, 2009-10, PDI grew 14.7 per cent and per capita PDI by 13.2 per cent. That year, then Finance Minister Pranab Mukherjee raised the threshold for I-T by Rs 10,000 to Rs 160,000 a year and removed the surcharge of 10 per cent on those earning Rs 10 lakh a year.

Year 2010-11 saw PDI growing 15.7 per cent and the per capita part by 14.2 per cent. In that year, Mukherjee did not raise the exemption limit but widened the slabs.

The 10 per cent rate kicked in up to income of Rs 5 lakh against the earlier Rs 3 lakh, the 20 per cent rate on income up to Rs 8 lakh against Rs 5 lakh and the 30 per cent rate from over Rs 8 lakh against the earlier over Rs 5 lakh. Also, an additional deduction of Rs 20,000 was given to those earning above Rs 1 lakh for investing in infrastructure bonds. The next year saw PDI rising 19.1 per cent and the per capita portion by 17.5 per cent, as the finance minister raised the exemption limit by another Rs 20,000, to Rs 180,000.

This growth was faster than inflation. For example, average wholesale price inflation was 9.6 per cent in 2010-11 and 8.9 per cent in 2011-12.

India's savings rate was 32 per cent of GDP in 2008-09 and rose to 33.7 per cent in 2009-10 and 34 per cent in 2010-11. It then fell to 30.8 per cent. With the the capital formation rate respectively at 34.3 per cent, 36.5 per cent, 36.8 per cent and then declining to 35 per cent in these years, 2011-12 saw a record CAD of 4.2 per cent of GDP.

This record seems set to be broken this year, as the CAD was 4.6 per cent of GDP in the first half against four per cent in the first half of 2011-12 despite the exemption limit having again been raised by Rs 20,000 to Rs 2 lakh a year.

When asked why the government should raise the I-T exemption limit when it was not leading to a higher savings rate despite high interest rates or perking up investment rate sufficiently, CARE Ratings chief economist Madan Sabnavis said, "The reason is to give more income in the hands of people so that the effects of inflation could be blunted." However, Sabnavis also said he also could not dispute the arguments given in the query.

Deloitte India economist Anis Chakravarty said the larger issue was that investment was not perking and the government should increase the tax base rather than increasing the rate. He did not comment on the exemption limit. There has been a proposal mooted by the Prime Minister's economic advisory council chairman, C Rangarajan, for a higher tax rate on the rich.

Parliament's standing committee on finance had recommended raising the tax exemption to Rs 3 lakh, as against the Direct Taxes Code Bill proposing it at Rs 2 lakh a year.

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