Private sector has not responded to government initiatives so far

Source– The post is based on the article “Private sector has not responded to government initiatives so far” published in The Indian Express on 8th February 2023.

Syllabus: GS3- Indian economy

Relevance– Changing structure of economy

News– Despite record profits of the larger firms and the increase in capital spending by the public sector, a broad-based recovery in private sector investments and consumption has not materialised.

What are the broad points that show the changing structure of the Indian economy?

Profits of larger firms– Larger firms have shown the trend of the rising share of capital and the falling share of labour in national income. A few big firms now account for a higher portion of profits.

In 2019-20, 433 firms had reported profits in excess of Rs 500 crore. In 2020-21, the first year of the pandemic, this rose to 517.

There were 1,558 companies whose profits ranged between Rs 100-500 crore. Together these  firms accounted for 77.41% of all profits. These firms represent just 0.2% of the entire corporate sector.

Corporate tax regime– For companies having profit above 500 crores, the effective tax rate is around 19.14%. It is much lower than that for the smaller-sized companies.

For firms with profits in the range of 0-1 crore and 1-10 crore, the tax rate was 24.82% and 23.13% respectively.

These tax rate differentials imply that the larger firms have either availed of the higher deductions or incentives under the old tax regime or have shifted to the new regime of lower taxes.

So far, 20% of all firms have opted for the exemption-less regime. These firms account for a little more than 60% of total income.

This suggests that the larger, more profitable firms are opting to shift. There are also indications that this regime has perhaps led to a reduction in tax disputes.

However, only 3,508 companies had opted for the 15% tax regime during this period. This suggests that lower tax rates were perhaps not strong enough incentive for fresh private sector investments in the manufacturing sector.

New Income tax structure– The new personal income tax regime has not seen much traction. Migration to the new regime will depend on the extent of individuals taking advantage of the existing exemptions. The revenue foregone by the government on these items are still high

Calculations suggest that if a salaried taxpayer is availing of exemptions for investments and medical insurance, then the switching point will perhaps be a little less than Rs 9 lakh.

However, the more the exemptions are availed, higher will be the income threshold at which the individual will want to switch to the new tax framework.

Increased public investment– The larger public sector now accounts for a much bigger share of overall investment in the economy than before.

At the end of 2022-23, capital expenditure by the public sector was around a quarter of all investments  in the economy. Their share is up by roughly 5% since 2014-15.

In the coming year, if state governments match the central government’s  increase in capex, then the share of the public sector in total investments in the economy may be closer to 30%.