The Middle Class Is In The Middle Of Nowhere
Middle class is the heartbeat of the economy. It has been the engine of growth over the last two decades.
India’s economy is consumption led. The vibrant middle-class is consumer, and a catalyst to investment. They are nourishers too, contributing sizeable direct & indirect tax revenues.
Without lobbies & largesse they are the ‘abandoned’ children, punch below their weight in political terms and getting increasingly irrelevant in the political narrative.
Many grudge their contribution being redistributed.
Trickle down hasn’t worked. Rising tide doesn’t lift all boats
Our policy making has been dominated by the supply-side, trickle-down dogma, and centred around the wrong belief that inequality is a by-product of rapid growth. It’s compounded, by an equally misguided conviction that the gains of those at the top will eventually trickle down to the middle and the bottom.
It needs reversing.
Policymakers must recognise that there is an alternative theory of economic growth. Over decades they have focused on only two social groups, namely the rich & poor, and neglected the socioeconomic role that intermediate groups. One can understand the despondency of the middle and the salaried class.
The poor have votes. Middle-incomes are opting out.
They are denied the benefits, even neglected in most government schemes. While one understands tax waivers to the marginal and the middle income farmers, it becomes difficult to justify the rich and the endowed ‘escaping’ the tax net. This is evasion.
In parallel, the government’s reliance on indirect taxes is rising, and is now approximately half of the gross tax revenue. Indirect taxes coax more out from the poor and the middle class as a proportion of their income. This is unfair; even troubling.
Tax revenue from the consumption triggers growth.
The middle class is diversified, large constituency, mostly urban and scattered, ‘spending’ Rs 90,000 to Rs 3.5 lakh annually. About 40% of Indians ‘qualify’.
They ‘drive, build, clean & serve’ the economy
The ‘lower’ middle class spends on average about Rs. 1.1 lakh annually. Most are plumbers, carpenters, electricians, mechanics and street vendors. A large proportion is ‘outsiders’ (migrants), and the nation’s indispensable workforce.
Middle-income segments like upper, lower and the middle are porous, with minimal entry barrier. Many easily “move up” within this group. Similarly many poor ‘enter’ the middle-class. Indian economy has done several things right. The rapid growth of the last three decades has pulled a majority out of poverty. Transition and mobility are seamless as a result of growth and because of demography. Even if half of the poor make the transition to middle-income, it will propel consumption and trigger growth.
In a consumption led economy, pattern is as important as the size of consumption itself. This is more relevant in unequal economies like India, where a third are able to afford only the basics. No more.
Economic mass; discretionary spending
The consumption pattern of a fifth of the middle class (‘aspirational’) is transformational. They are young & cosmopolitan, and spend on holidays, entertainment, health, luxury, durables, and mobility. Thanks to higher purchasing power, households with just a third of the income of their USA counterpart can afford similar lifestyle.
The shifting consumption pattern from ‘necessities to discretionary’ is accelerating and ‘value’ enhancing. As the number of earning members per household goes up, disposable household income grows non-linear, boosting the economy.
An empirical Crux study across 16 states, focusing on the depth i.e. the consumption, and income heterogeneity articulates that size alone is not enough to grasp the complex mechanism of development in general, and economic growth in particular. It highlights indifference or lack of understanding amongst the policymakers on the correlation between consumption and growth.
The study highlights, relative size of the middle-class is higher in more developed states, articulating a positive relationship between development and middle-income segment. The study concludes that most policy initiatives focus on the demographic size, often ignoring the other key elements i.e., the distribution of income and the velocity of growth in number (mobility from poor to middle-income).
Growth lever, good citizen
The ‘mass’ of the middle income enables a potent aggregation of micro-economic stimulators. Entrepreneurship and invention are rooted in the middle class, particularly the better off. They invest, explore, invent, and innovate; have the zeal for upward mobility. They invest in education & health; build human capital, enhancing several other societal parameters.
The growth momentum is fuelled further by productivity enhancement from the ‘scale’ effects and investment ‘for the future’ as well as ‘forward-looking’ public investments.
There are several other features of a middle income led growth.
Strong middle- class is an economic anchor, providing safety net against booms and busts. They are trustworthy, hardworking, enabling efficient business transactions. In an enabling ecosystem and with start-up capital they thrive.
A stifling middle-class is detrimental to governance. As wealth gets concentrated with a few (10% own over 85% of wealth) they exert even more political influence, distorting the democratic milieu, diminishing societal outcomes.
Fulcrum of democracy
While the rich have been ‘opting’ out, the middle class is ‘wedded’ in. Their fate is more linked into the quality of governance on one hand, and growth on the other.
They naturally have a strong interest in in promoting foresighted and fair policies compared to the wealthy. However, a Crux study of 2019, across 35,000 voters points to a disturbing trend. While one would expect the middle class to be more politically active, they are, in contrast drifting away. They vote infrequently, are indifferent. They engage less with political ‘influencers’, and are much less involved in political process. It lowers their weight.
The political class has begun to read this, and disregard their views, even ignore and shun their needs.
The PM truly appreciates that stable and Aatmanirbhar democracy needs a strong middle-class and relatively low levels of inequality.
Middle- class; ‘ignorable’ no longer
The problem of increasing income inequality is not just problems that result from how the economic pie is divided but also causes of ‘too slow’ an expansion of that pie. This is why the middle -class should be the focus of our socioeconomic policy.
While there is a need to recognise, even reward the contribution of the middle-income, the PM’s larger goal must be to intensify efforts to move people from poverty into the middle-class. This transition will be exponential to growth and is key to inclusive development.
