Discretionary Spending Keeps GST Collections Buoyant Despite Sluggish Consumption Growth

While the uptick in GST collections would suggest higher consumption of goods and services, data from the Central Statistical Organisation (CSO) points to sluggish private consumption expenditure, which are estimated to grow just 3 per cent through FY 2023-24. 

If the economy, as a whole, is not consuming enough, but sales tax on goods and services are going up, then there must exist some important nuances hiding in the detail.

The Secretariat, therefore, dived into data to find the products, and their consumers, that are driving the growth in GST collections.

Top Layer Of The Population Splurging More Than The Rest

When overall consumption is down but sales tax collection is rising, it is prudent to look into discretionary spending -- that is money spent by consumers on goods and services other than essential consumption such as food, shelter and clothing. 

Sales of automobile vehicles rose about 19 per cent year on year during the 42-day festive period in FY2023-24. In the January-March quarter of 2024, housing sales in the top seven metro cities increased 14 per cent from a year ago.

While the market size of India’s full-service restaurants is slated to grow 12 per cent annually during 2024-2029, the revenue growth in quick-service restaurants in the current fiscal is likely to be 15 per cent to 18 per cent.

Those who can spend are also travelling (within the country and abroad) in their leisure time. The travel sector is estimated to experience a robust year-on-year revenue growth of around 30 per cent. No wonder the allied hospitality industry has shown a strong 15 per cent to 17 per cent revenue growth in 2023-24.

The Indian beauty and personal care industry is also surging ahead, growing in value by 15 per cent in 2023 with most money spent on soaps, deodorants, hair wash and hair colours. 

India’s smartphone shipments market data reveal that the ultra-premium segment, priced at more than Rs 45,000 a handset, grew by 51 per cent in the October-December quarter of 2023.

Confederation of Indian Alcoholic Beverage Companies (CIABC) estimated that growth in sales of alcoholic beverages was 7 per cent to 8 per cent in 2023. The telling fact of the statistics is that the products priced above Rs 500 fueled this growth.

Data from Razorpay, one of the largest payment gateways in the country, shows Indians increased their spending on dieticians by a remarkable 125 per cent through 2023-24, while health coaching saw a significant 45 per cent jump, and sales of multiplex movie tickets rose 42 per cent.

In other words, those who can spend are splurging and pushing up GST collection. This, in turn, is driving the growth of GDP. However, the broader economy continues to battle a lack of momentum in aggregate consumption demand. There is only one statistical inference that can be drawn from these observations. The top layer of the population is consuming more and more, while the rest of it are finding it difficult to make ends meet.

Buoyant GST Collection Growth Aligns With Nominal GDP Growth

Monthly GST collections more than doubled in the past six years, from Rs 1.03 lakh crore in April 2018 to Rs 2.10 lakh crore in April 2024. Plotting 3-month moving averages of the monthly collections during these six years depicts this buoyancy (see chart).

Initially, growth in GST collections lagged below the nominal GDP growth. The pandemic saw GST collections growth exceeding nominal GDP growth for obvious reasons. Afterwards, these divergent fluctuations remained in 2022, but since the beginning of 2023, there has been a clear convergence of GST collections growth and nominal GDP growth.

The convergence is possibly an early sign of the GST collection mechanism normalising after initial hiccups. This evidence suggests a strong correlation between nominal GDP and GST collection may be building up gradually.

Not So Progressive

The tax collection system in any country is characterised as progressive or regressive, depending on the direct to indirect tax ratio. If the former has a bigger share, the tax structure is deemed progressive. When the latter exceeds the former, the tax system is considered regressive. 

To put a simple illustrative example, for a one-rupee matchbox, a rickshaw puller and a millionaire pay the same amount of GST (12 paise), an indirect tax. While the rickshaw puller would not pay any income tax, the millionaire has to pay 30 per cent direct taxes on her income.

So, if direct tax collections are higher than indirect tax collections, it means the tax system is redistributing income in favour the poor. If it is less then it implies a higher share of incremental income accruing to the rich.

At the start of the new millennium, the share of direct taxes in GDP lagged that of indirect taxes by 2.4 per cent points. The gap persisted until 2006-07, when direct taxes overtook indirect taxes and kept expanding the lead to a peak 2.0 per cent (of GDP) point in 2009-10.

The reversal of trend marked the onset of a progressive tax structure, as economics textbooks would define it. It has remained so, with the exception of two years -- the demonetisation year of 2016-17 and the pandemic year of 2020-21 -- when direct tax collections again slipped below indirect taxes.

However, the lead that direct taxes have had over indirect taxes has narrowed - to 0.9 per cent of GDP in 2022-23 and 2023-24.

Whether the implementation of GST has had anything to do with this relative suppression of direct tax collection in recent years is beyond this article's scope, but an extremely worthwhile point to ponder upon.

Continued GST collection buoyancy notwithstanding, the macro GDP data confirms a slowdown in the growth of private final consumption expenditure (PFCE). It has been declining in the last couple of years. The growth in PFCE in 2023-24 was the slowest in two decades, barring the pandemic year of 2020-21.

Such a phenomenon of dipping macro consumption and rising indirect tax collections is a larger symptom of an entrenched lack of economic redistribution. It is imperative the government took cognisance and brought remedial measures.