India’s middle class left stranded in a political muddle

It is that time of the year when the taxpaying middle class hopes the promised dawn will arrive. The middle class is stranded in a political muddle between oligarchs extracting rent and parties wrenching rent for votes.
The most viral memes on social media are about GST, freebies announced by parties, dysfunction in the delivery of basic services, tax rates and the state of urban India.
The most viral memes on social media are about GST, freebies announced by parties, dysfunction in the delivery of basic services, tax rates and the state of urban India.Express Illustrations
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Young Kevin is a member of India’s proud and hard-working middle class—educated, employed and aspirational. At a conference this week, he asked, “Will there be a cut in income tax?” I asked him what would be the base minimum he desired. The answer shot across the room like a bullet: 18 percent. I asked what the logic was behind the precise percentage, and he replied, “Well, they are charging me 18 percent GST on what I consume.” The interaction represents familiar frustrations over the rising cost of living across middle class homes in India.

The context of hardship and notion of neglect are aggravated by the parade of populism unleashed by political parties. On Friday, the BJP released its manifesto in the run-up to the Delhi assembly polls. The promises include meals at Rs 5 in a country where 813 crore people receive free rations under the Pradhan Mantri Garib Kalyan Anna Yojana. Other promises include Rs 2,500 to women from poor households and gas cylinders at Rs 500 with two free refills for the poor. The middle class taxpayer is absent in the electoral calculus.

Cleisthenes of Athens, the founder of Athenian democracy—the idea of a government of the people, by the people and for the people, and of rights resting with the citizenship of a place rather than a clan. His template is virtually upended today. Governance is often seen based on the electoral might of castes, creeds and classes. For sure, it is a government of the people. But there is a rising perception that politics is redefining governance as goodies for some people.

It is that time of the year when the taxpaying middle class hopes the promised dawn will arrive. The most viral memes on social media are about GST, freebies announced by parties, dysfunction in the delivery of basic services, tax rates and the state of urban India. This year is no different, as hopes are building up around speculation.

The expectations are at a confluence of politics and economics. The persistence of food price inflation—hovering at around 8 percent for over a year—has shrunk the purchasing power of middle class households. The slide in consumption has exposed the reality of structural inadequacies haunting and halting the virtuous cycle of demand, consumption, investments, employment and growth.

The slowdown, which was visible by mid-year and signalled by this column in October, has been validated by data. The steep decline in second-quarter real GDP growth to 5.4 percent, with echoes in the first advance estimates of GDP growth for the year at 6.4 percent, reflected a slide in consumption and in both public and private investment.

The political alibi for the lower-than-targeted number is that the economy was interrupted by elections. This is true in part, but there is also the harsh reality of state governments ramping up spending on sops and slowing down capital expenditure growth. Indeed, the much-vaunted GST collections are growing slower than the 9.7 percent rate of nominal GDP growth.

The prescription for addressing the slowdown, again, is at the intersection of economic and political arguments. Classical economic theory suggests the government must loosen its purse-strings to stimulate demand. The question before the government is whether to ramp up spending on the alphabet-soup schemes (ELI, PLI et al) and infrastructure, or deliver income tax rate cuts to put more money in the pockets of the middle class.

Context is critical for policy. Economic growth has additional challenges including uncertain global trade, dollar outflows, the rupee’s slide to new lows and rising crude prices. What is also critical for growth is the level of deficit that defines borrowing costs and the debt-to-GDP ratio.

Aspiring for an upgrade in India’s sovereign ratings, the government is targeting a fiscal deficit of around 4.5 percent of GDP. Much depends on the room for expenditure. Members of the PM’s Economic Advisory Council estimate that if all things—growth, expenditure and revenues—remain constant, the government will have around Rs 1 lakh crore to design an economic revival.

The rage echoing across the WhatsApp universe reflects expectations of lower income tax and GST rates on day-to-day consumption. State governments are spending over Rs 4.7 lakh crore on subsidies—including Rs 2+ lakh crore just on cash transfers to women. The expectation is simple. The taxpaying middle class believes it deserves a share of the taxes collected; call it a rebate on the taxes that fund the schemes that propel parties to power.

The dilemma is what economists Horst Rittel and Melvin Webber called the “wicked problem”. Remember, inflation, slowdown and its consequences are also visiting the poor, and are fuelling expectations of pro-poor schemes. At best, the middle class can hope the budget will spur growth as a salve for its grief. Whether these hopes will fructify depends on the politics of economics.

Polymath and philosopher Aristotle, in his opus Politics, contended “the political community administered by the middle class is the best”. He observed that by “throwing in its weight [it] sways the balance” and prevents extreme outcomes. The theory has been kept at bay in India by the algebra of economics and arithmetic of politics. The middle class is stranded in a political muddle between oligarchs extracting rent and parties wrenching rent for votes.

Shankkar Aiyar

Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India

(shankkar.aiyar@gmail.com)

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