The Wealth Effect

The latest round of ITRs together with other data points suggest that wealth creation is spreading beyond super-metros and upper income classes. EPISODE #138

Dear Reader,

A very Happy Monday to you.

Little under a fortnight ago, the government released data on the latest round of Income Tax Returns (ITRs). As noted in last week’s newsletter this was a record. I also argued how if this is connected with other data points, it signals formalisation of the Indian economy.

In a follow-up interview (enclosed below) for StratNews Global, Srinivas Jain, Head of Strategy, SBI Mutual Fund, very insightfully observed that the ITRs also demonstrated the wealth effect. So, this week I revisit ITR filings to explore this argument. Do read and share your feedback.

A big shoutout to Balesh, Shiv, Atul, Premasundaran, Aashish, Monica and Vandana for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all you readers. Gratitude also to all those who responded on Twitter and Linkedin. 

The cover picture this week is of the iconic bull on Wall Street, New York and is taken by Daniel Lloyd Blunk-Fernández. It is sourced from Unsplash.

Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I would be grateful therefore if you could spread the word. Nothing to beat the word of mouth.

Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.

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Photo by Daniel Lloyd Blunk-Fernández on Unsplash

Trading Up

As mentioned in the introduction, the recent round of Income Tax Returns (ITRs) filed by 31 July reveal several structural trends enabling a profound and unprecedented makeover of the Indian economy.

Last week I argued how it is holding a mirror to the growing formalisation of the Indian economy. Something that is democratising access to the benefits like credit, social security and so on that naturally accrue to those operating within the framework of a formal economy.

A fortuitous interview with Srinivas Jain, Head of Strategy at SBI Mutual Fund, pointed me to the growing wealth effect being reflected in the ITRs.

I followed up on this remarks and basic research uncovered how financialisation of savings is gathering momentum in the Indian economy. Further, it is a story that is playing out beyond the super-metros like Mumbai and Delhi. It is time therefore to sit up and take notice.

If the 2011 Census showed us that India was on the path of material trading up (Check-out this trading up series I had initiated in Mint in 2012), then the new ITR numbers together with the rapidly spreading digital footprint of 1 billion Indians reveals that the country is gradually democratising wealth creation.

The Geographical Spread

To demonstrate the geographic spread I have used the above graphic. This data is sourced from the Income Tax department and is only available till 30 June.

This time I tried a new graphic presentation.

While the colour coding tells us the big story, hovering your cursor on each state or clicking on it will show up the ITRs for each state. Further, you can download the image if you want—do check it out and share your feedback.

The graphic shows that ITR filings for last fiscal, as on 30 June, are reasonably spread out. While Maharashtra continues to be the leader, other states are moving up with respect to ITR filings.

In contrast check out the graphic below for the ITR trends in 2014. (Ladakh is coloured white as it was not classified separately.)

A comparison of the two maps capturing the ITRs filed in 2014 and 2023 reveals that the trend is picking up across states.

Uttar Pradesh and Bihar are pleasant surprises though. I suspect the former has a lot to do with Noida, which is a hub of all hues of the middle class as well as High Net Worth Individuals or HNIs.

To be sure rise in ITRs is not just because of growing incomes. It is also due to better compliance, especially after the tax authorities have begun to link and monitor the fiscal trails of all economic entities. Essentially, the cost of non-compliance has gone up. Both factors are clearly complementing each other.

As Srinivas Jain put it:

“What I saw very interestingly, in the recent numbers that the Income Tax Department put out, was that in places like north-east, Chattisgarh, even Jammu Kashmir, the the new ITR filings have grown in double digits.

In fact, the growth was something like 20% plus, while in the traditionally big states, the growth is (lower at) around 9-10%.”

The Wealth Effect

Going back to my conversation with Srinivas Jain, I was struck by his observation about the underlying trends in the ITRs data.

“One other data point that I saw very interesting is that while the tax base is improving, it is not necessarily at the bottom of the pyramid. I saw a big jump among those who file in the categories of less than Rs10 lakh and between Rs10-20 lakh.

This means there is a wealth creation effect or that tax compliance is improving. Either way, there is a definite boost in the number of people filing income tax returns. Of course our tax base is very low.”

I followed the lead and went back and looked at historical data—shared in the graphic above. To be sure this comparison, unlike the data shared on ITRs, pertains to the full fiscal year.

What I found was very impressive. But, as Srinivas Jain flagged, the base is small. Yet, the growth over the decade ended 2022-23 is staggering. In every slab, the number of individuals filing income tax returns has at the minimum trebled and in some instances quadrupled.

This is consistent with the growing trends in wealth creation—investments in a range of financial instruments, including stock markets—has steadily acquired momentum with growing financialisation of savings.

The assets of under management of the Indian mutual fund industry—a popular means of investing in stock markets—have surged in the last decade. It grew more than four-fold from Rs 10 lakh crore in May 2014 to a massive Rs46.37 lakh crore on 31 July this year.

Prima facie the weak signals—data points that indicate significant change could be underway—are apparent.

Weak Signals

Another proxy indicator of wealth creation is the spurt in opening of demat accounts. As the graphic above shows, in a span of four years, the number of demat accounts have more than doubled.

Similarly, a recent edition of the IIFL Wealth Hurun India Rich List, observed:

• There was no entrant from the software sector in the first Hurun India list released in 2012; in 2022 this number had grown to 73;

• In 2012 list of rich entrepreneurs came from only 10 cities; this number has surged to 76 cities.

In an interview granted after the release of the report and published in the Economic Times, Anas Rahman Junaid, founder and managing director, Hurun India, said:

“India is possibly witnessing the fastest wealth creation era in its history and things have changed very much from when we started the list in 2012 to what it is right now 10 years later.”

Interestingly, it is not just about the rich getting richer.

This wealth creation trend also includes several entrepreneurs who have broken the glass ceiling, overcoming legacy handicaps. Further, this geographic spread of wealth creation is not restricted to a certain income class or a clutch of cities.

The rise of the mutual fund industry, especially the introduction of SIPs or Systematic Investment Plan, has been a game changer. It is not just about the four-fold growth of the size of the assets under management to a staggering of Rs46.37 lakh crore on 31 July this year.

There is an even bigger subtext to this gigantic number. It is about how mutual funds are beginning to attract investors from beyond the metros.

Broadly, the industry classifies its source of investments in two categories: T-30 or top 30 cities (include cities like Delhi, Mumbai, Pune, Bengaluru, Kolkata, Chennai, Lucknow) and B-30 or beyond 30 cities (like Ambala, Kota, Meerut).

Check out how their share of total mutual fund assets has grown. In four years it has grown from 15% to 26%.

In the final analysis it is clear that the ecosystem for wealth creation in India has been enabled.

Material trading up—by fixing legacy deficits like access to banking, housing, electricity, Internet, drinking water and so on—together with growing aspirations are catalysing this trend.

Instruments like SIPs are only democratising this wealth creation opportunity. Just like Unified Payments Interface or UPI democratised payments and now Open Network for Digital Commerce or ONDC is poised to do for e-commerce.

In other words, the wealth effect will only grow, accelerating the unprecedented and profound makeover of India.

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Recommended Viewing/Reading

Sharing the latest post of Capital Calculus on StratNews Global.

Last week the government disclosed that the number of people filing income tax returns (ITRs) had recorded a new high: 7.4 crore. Given that returns can be filed till 31 December, this number would only grow.

Tag this with the surge in the number of taxpayers in the Goods and Services Tax (GST) regime and you have a trend: India’s tax base is growing, albeit slowly.

There is a very important subtext though: Together with the rapid expansion of the digital footprint of 1 billion Indians, this reflects the growing formalisation of the Indian economy.

To unpack this phenomenon we spoke to Srinivas Jain, Executive Director and Head of Strategy, SBI Mutual Fund.

Sharing the link below. Do watch and share your thoughts.

Till we meet again next week, stay safe.