Pre-budget ground reality: The Indian middle class under Modi 1.0 and 2.0 : 22-01-2021

With rising inequality in both developed and developing countries, the rich and the highly skilled are seen to benefit disproportionately from economic growth and globalization. The middle-class is often viewed as being squeezed between the wealthy, who own a disproportionately large share of the nation’s assets, and the very poor who can fall back on government aid. The salaried middle class pays a large share of India’s income taxes, but is often discontented due to inadequate public services, and its earnings gets eroded year-after-year by inflation. Despite these odds, the Indian middle class has played a valuable role in the country’s economic development. How has this class fared in recent years under Modi 1.0 and 2.0 ?

The Indian “middle class” in popular usage refers to a large swathe of India’s population and may not correspond strictly to an economic or income classification. Instead of the usual middle quintiles of the population defined by annual income, I consider three categories of Indians by their characteristics – the “aspirational middle-class”, the “affluent middle class”, and the “middle-middle class”. Such a typology would cover the vast majority of Indians other than the uber-rich (top 2-3 percentiles) and the extremely poor (bottom 2-5 percentiles) in terms of income and wealth.

The “aspirational middle class”, although economically weak and facing considerable uncertainty in daily life, aspires to a better standard of living and is heavily influenced by mainstream and social media and the consumption patterns of higher-income classes. This category in urban and rural areas has benefited from government schemes such as direct benefit transfers (for example, the PM Kisan scheme), financial inclusion agenda (Jan Dhan Yojana), LPG subsidies, affordable housing, large scale construction of toilets, micro-health insurance and micro-pension schemes, among others. This class has also benefited from the expansion of temporary or gig employment especially in the services sector in urban areas. The continued success of the ruling party in successive national, regional and local elections may owe partly to fulfilling the aspirations of this class.

The “affluent middle class”, which usually owns financial assets, bank deposits, and real estate, is typically composed of salaried employees in middle- and upper-management roles, professionals (for instance, accountants, doctors, and lawyers), and small business owners. This class has gained from broadly rising real estate and stock prices, despite a decline in GDP growth in the pre-Covid period and during this ongoing pandemic. Among this category, small business owners have faced some inconveniences due to issues with GST implementation and competition from larger firms, but have also benefited from access to growing markets through digital platforms and, in recent times, from government-guaranteed bank loans during the Covid-19 crisis. The rise of the affluent middle class has coincided with an increase in foreign and domestic travel, greater numbers of Indian students in foreign universities in the United States, Europe, Canada and Australia, and increased spending on discretionary items.

The “middle-middle class”, with relatively stable but low-paying jobs, typically living paycheck-to-paycheck, and with little savings, may have benefited the least. Nevertheless, it has not seen its earnings decline significantly in the medium-term. The trend of replacement of permanent jobs with contractual and gig economy work pose challenges for this class. This class has traditionally seen education as a way to maintain its status or rise to the affluent middle class, but the rising cost of both public and private education threatens its tenuous grip on its way of life.

The above suggest that a resumption of economic growth in the post-Covid-19 era would benefit the upper and lower strata of the middle class to a greater extent. The mass deployment of vaccines and an expected sharp post-Covid economic recovery would bolster the affluent middle class the most, but a rising tide will likely lift all boats. Further improving the ease of doing business, reforms to direct taxes, skill upgradation and infrastructure spending will be critical for: (a) creating the millions of jobs that would be needed for the growing aspirational middle class, and (b) generating sufficient tax revenues that are needed to fund the social welfare and transfer programs and prevent social discontent among this class. Ease of doing business reforms must be accompanied by continuation of efforts to further ease the daily lives of the middle class.

Source : Times of India

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