India's Double-Edged Growth: Bridging the Rural-Urban Divide

Over the 2014-2024 decade, Prime Minister Modi oversaw the largest step-function in socio-economic development in the history of independent India. He ensured almost all citizens have access to basic necessities – a roof over their heads, a toilet, power in the switches, water in the tap, food and gas connections, rural connectivity, access to education, mobile phones, access to the internet and digital platforms, digital and financial inclusion with bank accounts and money in the accounts, and affordable healthcare and insurance. Deprivation has decreased dramatically.

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Purchasing Power of Rural Women is Key

However, over the last 10 years, income has grown at different rates for the bottom 50% compared to the top 50%. Incomes of the workforce dependent on agriculture are growing slower than in the industry and services sectors. Our analysis shows, in FY24, an agricultural dependent earned, on average, ₹73,436 annually, against ₹2,08,820 and ₹3,59,431 for dependents on the industry and services sectors, respectively—a massive skew of 1:2.8:4.9.

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The same analysis in FY20 shows sectoral per-capita GVAs of ₹55,594 in agriculture, ₹1,55,450 in industry, and ₹2,21,391 in services sectors. An income ratio of 1:2.8:4.0 has expanded to 1:2.8:4.9 in 4 years– showing significant growth in the services sectors where per-capita incomes have grown at 12.9% CAGR. Industrial incomes have grown at 7.7% CAGR while agricultural incomes have grown at 7.2% CAGR. While it may seem that the two growth rates are comparable, the absolute growth is not – agricultural incomes have hardly increased by ₹17,800 per capita over four years whereas industrial incomes have risen by ₹53,000. This is further exacerbated by the fact that more people rely on agriculture (45.8% of the workforce) compared to industry sectors (25.2%). This differential between the three sectors is bound to grow unsustainably unless the government intervenes. It is essential to directly impact through income transfer mechanisms.

10 crore families receive subsidized LPG cylinders under PMUY. It is suggested that a DBT program be launched for BPL women who receive subsidized gas cylinders, wherein they receive ₹2,000 in their bank account every month amounting to ₹24,000 in a year. For the government, this may add up to ₹20,000 crore monthly and ₹2,40,000 crore for a full year. However, if announced on August 15th, 2024 and the scheme launched in September, the cost to the government in FY25 may amount to ₹1,40,000 crore.

This DBT scheme will be significant as it will give the women economic freedom and financial stability, and, to some extent, bridge the income differential. The 2024 elections showed how women, particularly in the rural areas, were induced by the opposition parties’ promises of DBT and cash transfers. This demonstrates the dire need to increase cash in hand for this category of citizens.

The question arises where the revenue to support the DBT scheme will come from. One stream is the surplus dividend from RBI this year. While the government had budgeted for a dividend of ₹1,50,000cr from RBI and PSU banks combined, the RBI shocked the market by alone transferring ₹2,10,874cr to the government account. PSUs have also performed exceptionally well. Total dividend from RBI and PSUs combined is likely to be ₹3,50,000cr, well over the budgeted ₹1,50,000cr. These additional dividends of over ₹2 lakh crore can be utilized to boost the purchasing power of 40 crore Indians at the bottom of the pyramid. Crucially, this is out of already available revenue and not out of borrowings.

States can also consider implementing their own income support schemes for BPL women. The Maharashtra government just announced a scheme providing ₹1,500p.m. for women starting July 2024. Other states can also allocate budgets to supplement the Central Government’s scheme.

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Middle-income Taxpayer Base Needs Urgent Relief

It is equally essential that the middle class, which forms the backbone of India’s tax collections, employment, and consumption dynamics, get relief. Various factors have impacted them over many years, including high inflation. In particular, taxpayers in the age groups above 55 cannot avail themselves of the existing tax breaks as most have paid back housing and other loans and have already saved up for retirement. Out of nine crore taxpayers, hardly one crore have housing loans. Providing further tax breaks is not of much use for this section as it locks up money which they could alternatively invest in equity.

It is suggested that as a measure of relief to the middle class, the income slabs be rearranged as follows:

• 0-5L – 0%

• 5-10L – 10%

• 10-15L – 20%

• 15L+ – 30% with a surcharge of 12% on those above the 15L slab

Only deductions of 80D for insurance and 80G for philanthropy can remain; all others can be removed

This rearrangement can be provided as an alternative option along with one already available option with many deductions. The above suggestion might cost the government ₹50,000 crore as only about 35-40% of taxpayers may opt for this tax slab arrangement. Nonetheless, this will significantly give relief the middle class, which consists of big supporters of the NDA during the 2024 elections.

Based on the higher economic growth rates predicted in FY25 and the higher GDP base of FY24, there is a significant possibility that income tax, corporate tax, and GST collections may exceed the budget estimations by ₹2 lakh crore or more. These elevated collections, after transferring shares of the states, along with higher dividends from RBI and PSUs, will provide all the surpluses required to power any schemes Modi 3.0 could formulate for the relief of the taxpaying middle class, the rural economy and the voter base.

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Originally published on Financial Express