This miserable state is borne by the wretched souls of those who lived without disgrace and without praise- Dante Alighieri.
Dante, the author of Divine Comedy, was talking about afterlife. He could well have been speaking about the Indian middle class. With neither the circumstance of the rich nor the political draw of the poor, the middle class is damned to be the milch class. Now, it would seem, the middle class—all those who have a bank account, who pay taxes and who have to fill many forms to prove that they exist—is not only not praised but cursed if they dare to crib.
The standard defence of many ministers in government is to describe any critique or criticism of governance as a middle class view, almost in contempt. The middle class is accused of paying less for the LPG cylinder as if it is their fault that the successive governments have messed up fuel pricing. The middle class is accused of enjoying exemptions—on savings and assets—which really are meant to promote the interests of the corporate class. The middle class is scorned for benefiting from exemptions and standard deductions available to tax-payers world over. The theory preached by the political class is that the middle class is the biggest beneficiary of the subsidy raj, is the most subsidised group in the democracy.
Nobody though wants to discuss the fact that the much-maligned and damned middle class saver is subsidising the political economy by paying a silent tax that is not listed anywhere nor is it part of any discourse. How so? Year after year, middle class savers trust monies with banks, mutely accepting lower than real returns on their hard-earned, tax-paid savings.
For the purposes of clarity, let us restrict the time frame to UPA II. Consider the sequence of this political equation. Between June 2009 and June 2012, consumer price inflation has averaged 10.45 per cent. In simple terms, the cost of life has gone up by 10.45 per cent year on year from June 2009 to June 2012. How should this translate into the cost of money? Since the views of American media and the American President seem to matter to the powers-that-be, let me illustrate this with the rates of inflation and government borrowing costs in the US. In June 2012, consumer price inflation was estimated to be 1.7 per cent. The rate for the US government 1o-year Treasury paper is currently 2.14 per cent.
Ergo it follows that the cost of money should be at least 10.45 per cent or higher. And to be sure, the government, which is responsible for profligacy and rising inflation, must at least pay for its share of sins. But that is not the case. The government happily borrows at around 8 per cent. Indeed, the average cost of borrowing, the economic survey tells us, has been less than 7.5 per cent for the past five years. So who is bearing the cost of the subsidy of 2.5 per cent or thereabouts? It is the average Joe who has his savings parked in the banks for the government to dip into so it can fund its expenditure.
Very simply the real interest rates—what economists call this difference between inflation and interest on bonds—is negative. Now let us understand the magnitude of the subsidy borne by the middle class saver. Since 2009, the Central and state governments have borrowed around `15 lakh crore. The average rate of borrowing was around 8 per cent. We know that average consumer price inflation was 10.45 per cent. That means a discount of 2.5 per cent and compounded across three years that would translate into a subsidy of `115,000 crore. This year, governments (Centre and states) will borrow over `6.5 lakh crore to fund their expenditures. Figure out the subsidy at 2.5 per cent per annum.
Now this doesn’t stop here. To enable the government to borrow at 8 per cent or thereabouts, the bank rate has to be kept low and it is this rate that determines at what rates banks lend and what you get on your deposits. As of this week, aggregate deposits in banks tote up to `62.29 lakh crore of which time deposits account for `55 lakh crore. Now there is no way of ascertaining how much of the deposits belong to whom. But it is all public money and is earning less than it should be.
In fact, political profligacy has been bagging a running discount of 2.5 per cent. Is it any surprise that gross domestic savings as a ratio of GDP has dipped from 36.8 per cent to less than 32 per cent? Should the government be really surprised that the domestic savers have moved away from negative returns and have turned to gold as a better instrument of savings?
Indeed, it could be argued that inflation itself is being subsidised by the suppression of the cost of money. If the real cost of money was paid by government and the other borrowers in the economy, inflation would indeed be much higher than it is now. Now one cannot quantify this subsidy on this back of the envelope column, but there is no doubting the contribution of the silent tax paid by middle class savers in this.
Truth is the middle class is most impacted by the failures of any regime. The slowdown in growth and the spiral of inflation both affect the middle class wallet unequivocally. Slowdown impacts incomes. Inflation dents both savings and returns on savings. It does seem iniquitous that the middle class has been paying more and more to get less and now it is being denied even its dignity.
Shankkar Aiyar is a senior journalist who specialises in the politics of economics