India's Golden Goose: The Middle Class
To avoid killing the proverbial goose laying golden eggs, a policy course correction on the salaried middle class is overdue. EPISODE #184
Dear Reader,
A very happy Monday to you.
Responding to last week’s newsletter, Khatakhat Economics, an irate reader pointed out that it is the tax paying middle class which is picking up part of the bill on competitive populism.
This made me pause and reflect. My prima facie conclusion is that India’s rapidly expanding middle class is being taken for granted. This week I explore this relentless squeeze on the middle class, India’s proverbial golden goose.
The cover picture is a composition that stood out to me. The differing reflections of the dining area of the restaurant through various mirrors was striking—similar to how people view the same fact so differently. Hope you enjoy it too.
Happy reading.
Middle Class Angst
Little over a week ago, Mohandas Pai, an Infy alumni and and someone who is not a critic of the three-time incumbent Bharatiya Janata Party (BJP)-led National Democratic Alliance, shared a post on X (formerly Twitter) expressing disappointment at the government for ignoring the middle class even though they are suffering economic pressures.
Sharing the post below, check it out.
The rant by Pai and other influencers on social media is not without basis. It also comes in the backdrop of the 18th general election, which reflected some level of voter angst, in turn causing an erosion in the BJP’s seats.
When it comes to distributing sops, the poor and needy get first dibs. And, rightly so. Similarly, at the other end of the spectrum, India Inc is always queueing up for incentives like tax concessions. Despite this and host of other concessions, greenfield investments continue to stagnate. Worse, some of these HNIs are indulging in vulgar and public splurging of their wealth at family weddings.
Which brings us to the middle class. Yes, they have, over the last few decades, benefitted from improved ease of living—though improved access to basics like electricity, drinking water is a fundamental right of every citizen and not a special favour.
Today, every aspirational salaried middle class household is in the rat race of paying off EMIs for housing, consumer goods, education loans and medical bills. Not to speak about the growing burden of inflation, tax compliance and living with crumbling city infrastructure and deteriorating law and order.
All of this after paying their tax dues as model citizens. Indeed, they have cause to be miffed. Unlike earlier, their numbers, consistent with the expansion of the Indian economy, are growing. And, so are their aspirations.
Therefore, ignoring them is neither politically expedient nor clever economics.
Size Matters
The size of the middle class in India has already attained critical mass. Check out the graphic above sourced from PRICE (People Research on India’s Consumer Economy), an independent research body.
According to PRICE, India’s middle class is already topping 500 million—more than the population of the United States. In the next seven years it will grow to 715 million and then to a staggering 1 billion by 2047. This growth in the middle class mirrors the decline in abject poverty, with over 400 million people being lifted out of poverty in 15 years ending 2021.
Further, PRICE shares that the middle class is already the biggest contributor to national well being. Accounting for:
50% of income;
48% of spending;
and, 52% of savings.
Both, numerically and politically, the middle class therefore is a cohort that can no longer be ignored. They may not be wielding the clout of other cohorts, but just a matter of time before they are getting there.
And not to forget, 50% of this cohort are women—who as I have been arguing in recent newsletters are acquiring a mind of their own.
Clearly, the middle class is already a driving force of the Indian economy. And, yet they continue to get short shrift.
Tax Squeeze
The NDA halved corporate income tax, but income tax rates remains unchanged. On top of this, corporates have legit ways and means to avoid tax (as opposed to evading tax, which is a criminal offence), while the salaried are hit by either TDS (Tax Deducted at Source) or GST (Goods and Services Tax).
GST, instead of being simplified, is getting complicated every year, either through myriad exemptions or inclusions. I wrote about this tax overreach and how it is undermining the most important tax reform—which for the first time economically unified the country.
To make my point about the arbitrariness of these decisions and how they impact the ease of living, I am quoting examples from the previous newsletter.
“If you buy food items at the cinema hall then you pay a GST rate of 5%. However, if you purchased it online along with the movie tickets you pay a rate of 18%. Seriously!
Sadly, this is not an exception. There are several such examples.
For instance, you pay a lower rate of duty on chappatis and a higher rate on parathas—guess the use of ghee is serious value addition that deserves a higher levy!
Similarly, if an individual chose to stand in a queue and book a non-AC bus ticket they will be exempt from GST. However, if the same transaction was carried out using an app, then it is taxed at 5%.”
Sharing the newsletter below, in case you wish to re-read it.
The Tax Overreach
Dear Reader, A very Happy Monday to you. Little under a fortnight ago, the Goods and Services Tax Council (GST), convened its 50th meeting—a remarkable milestone, especially given that, barring one, all its deliberations ended in consensus conclusions.
Similarly, in another bizarre decision, the union government increased the TCS (Tax Collected at Source) on foreign remittances to 20% last year. In the case of remittances to fund either education or medical expenses, the TCS rate is 5%. In other words, for every $100 remitted, over and above the annual cap of Rs7 lakh, $20 and $5 respectively are held back.
This additional burden is patently unfair, especially given that the middle class is already facing a squeeze on cash flows on account of the unprecedented three back-to-back economic shocks beginning with the covid-19 pandemic. Many have had to fall back on savings to finance the hard times.
In the case of student loans, most parents have taken out an EMI from a bank. So the extra funds being held back only make them borrow more.
The bizarre part is that TCS is refunded when an individual files their tax return. However, the government does not pay any interest on TCS. Effectively it is interest free float money for the government—like rubbing salt into a wound.
Burden on Few
Like everything else about India, there is nothing homogenous about its middle class. It is split across income classes, with bulk of them at the bottom of the pyramid.
Consequently, the number of tax payers are fewer than those filing tax returns—which is mandatory. Check out the graphic above. This anomaly can only be corrected as the middle class trades up. Till then the tax burden and compliance continues to fall disproportionately upon a few.
To sum up then, the middle class in India has sufficient cause to vent. Despite being such a dynamic cohort of the Indian economy, sops have eluded them. The less favourable outcome of the just concluded general election for the incumbent NDA has put the spotlight on the middle class too.
It will be interesting to see if the upcoming Union Budget (to be presented on 23 July) will signal a course correction.
Recommended Viewing/Reading
Sharing the latest post of Capital Calculus on StratNews Global.
India pulled off one of the biggest heists in international cricket when it beat South Africa in the T20 World Cup final.
Cricket did even better—it found more than a toehold in the United States of America. And this in the land of baseball, American football and basketball. Unthinkable, even a year ago. But not after the US national team beat Pakistan, in one of the biggest upset in the league matches of the T20 World Cup and eventually qualifying for the Super-8.
How is cricket finding roots in the US? By accident or design? Will it claim a spot alongside baseball? To answer this I spoke to Venu Palaparthi, one of the several expats who have toiled over the last few decades to make this possible.
Do watch. Sharing the link below.
Till we meet again next week, stay safe.
Thank You!
Finally, a big shoutout to Rajeev, Premasundaran and Vandana for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all readers. Gratitude also to all those who responded on Twitter (X) and Linkedin.
Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I will 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😊.
Well written Anil !
Since majority of your readers are middle class thanks for highlighting their concerns !
Brief comment - GST has not only been major Tax Reform but significant achievement for the Economy ! There are stages for its rapid evolution ! Tax which helped the Economy to revive post Covid and enhance Government revenue had to go through the structure adopted since 01.07.2017 . It is to be normal that unlike other tax levies it didn’t have to wait for changes to occur at the end of the year. Thanks to its salient features of GST Council where in decisions were mostly through consensus- mini Parliament at work !
There are all indications of further responses in the near future !
Best regards
It is about bargaining power as a voting block. The middle class have different affiliations, as per religion, caste, perceived benefits and region; whenever the middle class unites for economic benefits, the political parties and governments will view them as a factor for getting elected; similar to minorities, farmers and backward classes. Till then the urban middle class is a divided lot, with no clout for forcing benefits. Perhaps the budget will streamline some areas of taxation.