In my previous article, (‘Our own deep state’, IE, January 24), I had discussed how Indian taxation and FDI policy needed deep correction. I had also hinted that much was right in India, especially with regard to job growth and gender equality. In this article, I will talk about job growth and how the fantastically good news on this front is being negated by our taxation policy in general, and especially by PIT or personal income taxes (it is the pits).
Job growth in India has been misunderstood, primarily because it is part and parcel of a political-ideological package. And, also because it is easy to confuse most people almost all of the time with jargon and slogans like “what India is enduring is a K-shaped recovery”. International organisations are involved in this mismatch of data with ideology. Just peruse the documents of three leading “influencers” — the World Bank, IMF and ILO.
So what is this great Indian story on employment? Simply, the Indian labour market has so transformed itself since 2011 that most policymakers and experts do not recognise, or are not appreciative of, the profound changes that have taken place. This article is not about politics even though the “start” date is 2011. The reason the first year under examination is 2011 is that the Union Ministry of Finance (MoF) has released detailed summary data on personal income tax collection for fiscal years 2011-12 through 2022-23. (Hereafter MoF-PIT data; for the latest year, see https://incometaxindia.gov.in/Pages/Direct-Taxes-Data.aspx)
Job Growth: Conventional wisdom (CW) is that there has been a profound lack of growth in formal-sector jobs in India. It is heartening to note that the complaint is no longer about the lack of jobs. The CW critics also don’t acknowledge or discuss that in the period of the fastest-ever GDP growth in India (2004-2011), job growth was a paltry 1 million a year; since 2011, job growth has increased by more than 12 million a year (NSS/PLFS data, population >=15 years).
The CW argument has now shifted to growth in paid jobs — excluding unpaid family workers — and further shifted to growth in jobs excluding agriculture. The pace of increase in paid jobs since 2011 — 10 million a year; increase in non-agriculture paid jobs, eight million a year. The latter since 2019-20, 16 million a year. I predict that the CW feet will now shift to a lack of growth in “formal” jobs. Here the CWs can define formal jobs as they wish since there is no clarity, or consensus, on what constitutes a “formal” job. How about a formal job as one which provides social security, union rights, and childcare and reflects your education, self-identified ability, aspirations and dreams?
There is a simple definition of a formal job — one in which income tax is paid. This definition should be acceptable to all — if not, why not? The income-tax payment criteria will, of course, miss out on all those who evade the tax net or under-report their income. According to this ultra-strict definition, the MoF-PIT data reveals that there were 18 million taxpayers in 2011/12, and 68 million in 2022/23. This is for any taxpayer; for a salaried taxpayer, the increase is from 9 million to 33 million. Since 2019-20, the increase in tax-paying salaried jobs has accelerated to 2.6 million a year, or at a 9.3 per cent annual rate.
This is not just job growth – it also reflects an increase in compliance. For those reporting a positive income, the “job growth” is upwards of 9 per cent (compared to 12 per cent per annum taxpayer growth). Note that as per PLFS, paid non-agriculture job growth has been at 3 per cent a year since 2011; at 7 per cent a year since 2019. No matter how the data is sliced, or cooked, there has been an impressive acceleration in job growth since 2011; even better since 2019. It is very likely that data on non-agriculture or tax-paying populations in other countries will not better the Indian record (this is speculation but not based on no data).
How often have you read the opinion/fact analysis of experts, and institutions that know “better” — the World Bank and IMF, for instance — about the lack of formal employment and consequent low tax collection in India? Nauseatingly often. And of course our own domestic experts, across political parties and ideologies, bow to this foreign-inspired wisdom. As pointed out above, the facts are otherwise and it is imperative that we, and our policy-makers, pay heed as early as Budget Day 2025.
Real Disposable Income — big decline: This large growth in employment has consequences — on real wages. When there is this level of supply being absorbed in the labour market, real wages get affected. PLFS data for salaried workers shows no increase in real wages since 2011. In contrast, real wages of casual workers have increased at an annual 2.2 per cent rate. It is unlikely that a large proportion of casual workers pay taxes. Salaried workers, with TDS, cannot avoid reporting their incomes or paying taxes.
Ministry of Finance (MoF) — and about as many official as you can get — records say that PIT tax collections have zoomed from Rs 1.7 trillion in 2011 to Rs. 10.5 trillion in 2022-23 and are expected to be above Rs 12 trillion in 2024-25. No need to get out your calculators — that is a 15 per cent annual growth rate. This success can be attributed to two factors. High growth in employment as noted above. But with no increase in real wages, there is another important factor at work — it is called the inflation tax.
Since the income-tax schedule is a progressive scale, it means there is an inflation tax. The same level of real income means an increase in nominal income. In other words, the middle-class taxpayer, especially the salaried worker, is falling behind while standing still. A Rs 15 lakh nominal income in 2024-25 was Rs 7.5 lakh nominal income in 2011-12 (price index has doubled). Tax outgo in 2024-25 is Rs 4.5 lakh (30 per cent tax). In 2011-12 at 20 per cent tax, it was Rs 1.5 lakh. Tax outgo has tripled while incomes have doubled, and real incomes are the same. This is why the middle class is upset. In the context of no increase in real pre-tax income, this can pinch, and pinch hard. As it likely did when the people voted on June 4.
The time for tinkerisation of tax rates is over. A non-tinkering tax cut on February 1 will be very good (and necessary) economics. It will also be very good politics. The counter-factual is business as usual (BAU). What happens with BAU? The fiscal deficit is reduced. So? Note that coincidentally, it’s the “experts” who are not favourable to the Modi government who shout the loudest about the need for a decline in the fiscal deficit.
In a poll on X, close to 80 per cent of the “voters” said they expect a BAU Budget. Policies work best when they are unexpected and non-tinkering — like in 1991. Like what happened in 1991, PM Modi should also open up the economy — lower import tariffs, facilitate FDI. In other words, go against the Deep State. My bet is that Modi-Sitharaman will do right on February 1, 2025.
The writer is former executive director, IMF. Views are personal
