There have been some rumblings over a mismatch between India’s robust growth numbers (8.2 per cent in April-December 2023-24) and the 3.7 per cent real growth in private final consumption expenditure (PFCE) for the same period (projected at 3 per cent by the Central Statistical Office for the entire year).

It has been argued by some that the GDP or national accounts statistics underestimate consumption. However, if we tap into three data sources, the Consumer Expenditure Survey, the Periodic Labour Force Survey and income-tax data, it would appear that the PFCE (figure in real terms over a period) is not an underestimate. The first two cover the bottom 90 per cent of the population, and the last, the remaining 10 per cent or so. The PFCE data encompasses all sections.

What emerges, broadly speaking, is an incomes crisis. If informal workers have seen a decline in real incomes over the last five years, a situation of stagnation if not decline in real terms seems to hold true more generally as well, including those at the lower end of the tax paying population.

Let’s begin with the income-tax data.

Higher end consumption

The income-tax data represents taxpayers (individuals and HUFs) largely working in the formal sector and earning relatively higher than those covered in the surveys. The average income for ITR filers from salary, business, and other sources at ₹6.7 lakh (excluding capital gains) collectively grew by 6 per cent (nine-year CAGR, FY22 or 0.6 per cent in real terms) and decelerated further to 4 per cent from the pre-Covid levels (FY19-22) or minus 1.2 per cent in real terms. Capital gains contributed just 4 per cent of the assessed income tax.

The proportion of income-tax payers to the adult population rose to 9.7 per cent in FY19 from 6 per cent in FY13, but the incremental rise to 10.3 per cent (98 million) in FY24E has been modest. This implies that the gains in IT coverage due to the compliance drive slowed in the post-Covid era.

The aggregate assessed salary of income-tax filers grew by 13.7 per cent CAGR during FY13-20, before decelerating to 7.6 per cent (FY20-24E). However, growth in income-tax collection accelerated from 9.4 per cent in the pre-Covid period to 20 per cent post-Covid.

This is because there has been a growth in the assessed aggregate salaries in the ₹9-50 lakh bracket, but a fall in the total salary of individuals in the sub-₹9.5 lakh category (78 per cent of IT filers) — see Chart 1.

Consequently, the income inequality of salaried income earners as measured by the Gini coefficient, rose from 43 per cent in FY19 to 46 per cent in FY22 (see Chart 2).

This implies that even among the ITR filers, real income increased significantly for the higher-income class while the mid- and lower-income class probably saw a contraction.

Corporate performance indicates that higher post-Covid inflation, driven by the surge in global commodity prices, gains from global supply shortages by way of exports, and increase in the market power of larger companies, benefitted workers dependent on them while also creating stagnancy in other sectors, thereby leading to a skewed salary and compensation growth across sectors.

Compared to the pre-Covid averages (FY13-19), there has been a widespread deceleration in salaries and wages for most manufacturing and services sectors. Contrastingly, financial services, including banks and IT services saw a significant surge in compensation growth.

The trickle-down of income inequality in the formal sector resonates in the State-wise decomposition of PLFS-based average worker earnings. Most States have seen a decline in real income over the past five years while southern States featuring the IT and manufacturing hubs have fared better.

Lower-end consumption

The 2022-23 CES data shows that real monthly per capita expenditure (MPCE) growth slowed to 3.2 per cent (11-year CAGR) in rural and 2.8 per cent in urban areas from 7.3 per cent and 5.9 per cent, respectively, from 2009-10 to 2011-12. The PFCE growth reports higher numbers. It captures affluent spenders who are under-represented in the survey data and who also have access to retail loans, while also encompassing the middle-, low-income households covered in the CES.

But since the CES survey has come with a lag of 11 years it will be hazardous to arrive at any definite conclusion without looking at the interim period, which has undergone several structural shocks such as demonetisation, NBFC crisis, GST implementation, and the Covid lockdown.

For the interim period, we draw from the PLFS data that started from 2017-18. While the latest survey 2022-23 (June) throws up some reassuring impressions of declining unemployment and rising labour force participation, the income data indicates a bleak scenario.

Averaging ₹1.6 lakh per worker, the estimated annual per capita income based on the PLFS data covering regular, casual, and self-employed workers grew in meagre terms at 2.2 per cent (five-year CAGR ending June 2023) or minus 3.1 per cent in real terms.

Income constraints appear to have forced higher worker participation (3.4 per cent, five-year CAGR), leading to higher household income growth of 5.7 per cent in the last five years (derived from PLFS data), barely matching the cost of living (5.3 per cent CPI, five-year CAGR).

Given the consumption pattern dominated by food items which is experiencing high inflation, the inflation impact is higher for the lower income segment.

We observe that unemployment fell by 10 basis points YoY to 3.4 per cent in 2022-23 (PLFS) driven by increased self-employment, specially in agriculture. This is perhaps a reflection of rising dependence in the rural areas, reflecting the decline in labour productivity. Therefore, rising labour force participation rate (PLFS 2023), particularly among rural women, is not due to bountiful opportunities. Consumption demand for about 90 per cent of the earning population could have also fallen over the past five years.

Given that private consumption is the biggest contributor to India’s GDP hovering at 60-61 per cent, such low growth amid the reported decline in household savings, implies a flat household income (76 per cent of GDP) scenario. Excluding the leveraged consumption in FY24, preliminary estimates indicate the non-leveraged portion may have contracted.

The collective assessment of survey-based CES and PLFS data and I-T collections reinforce that the deep-rooted income inequality has been associated with falling real income, which is impacting household consumption levels and patterns. The microdata of household situation thus explains the paradox of robust headline real GDP growth yet the persistent lack of private capex. Untangling this macro quagmire would require a radically different policy approach that retrieves the household situation.

Sinha is Co Head of Equities & Head of Research - Strategy & Economics, Systematix Group. Views are personal

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