Households Face Double Whammy Of Joblessness And Healthcare Expenditure

India Ratings and Research (Ind-Ra) believes that with no relief in sight on the tax front, households are facing a double whammy. On the one hand, they are struggling with job losses/salary cuts and on the other, they are facing stepped-up health expenditure due to the impact of COVID-19 pandemic.

The challenge, in Ind-Ra's view, therefore is emerging on the demand side. It firstly manifested in FY20 when the private final consumption expenditure growth declined to 5.5% from an average 7.5% during FY16-FY19. Thereafter, the two successive years of a massive economic shock have eroded the households' disposable income, which was already under pressure reflected in low per capita income. Ind-Ra's analysis of salary/wage growth of 2000 non-financial corporates corroborates the fact that the risk of declining real wage growth could limit the consumption and demand improvement both in the near and medium terms.

The burden of taxes, particularly of indirect taxes, on households has worsened lately. As the global commodity prices slumped around February-March 2020, the union government raised the excise duty on petrol by Rs 13/litre and on diesel by Rs 16/litre between March 2020 and May 2020. The average price of Indian crude basket during this period was USD28/barrel. However, the price of Indian crude basket in May 2021 has reached USD67/barrel, leading to the retail prices of petrol and diesel now reaching record levels, impacting household budgets both directly and indirectly.

It is well known that indirect taxes are not progressive by nature and lead to a disproportionately higher welfare loss to households that are at the lower end of the pyramid. Although the union government rationalised the corporate tax FY20 to align it with global peers and spur investments in the economy, taxes on households have been unaltered.

Aggregated Tax Burden:

The share of total tax burden on households (assumption: non-corporate income tax+95% of GST) has risen to 75% from 60% in FY10. This is largely due to the combination of a higher excise duty on fuel and a reduction in corporate tax. The corporation tax has been rationalised to augment job creation and attracting direct foreign investments. The agency believes it was legitimate to rationalise the Indian tax structure as opposed to peer nations' in the export segment. However, the unforeseen economic shocks owing to the pandemic have worsened the balance between household and corporate taxation system.

Interestingly, the household tax burden came down to below 60% in the last decade, and that was the time the economy exhibited a consumption and investment boom. However, it is also true that along with a lower tax burden and higher disposable income, there were other conducive factors for the virtuous cycle in the economy