PM Modi has let down India’s middle class, which propelled him to power in first place

Factors such as GST, unchanged personal income tax rates, inflation, under-allocation of funds for public services such as education and health care have all hurt the prospects of Indian middle class

PM Modi has let down India’s middle class, which propelled him to power in first place

V Venkateswara Rao

“A healthy middle class is necessary to have a healthy political democracy. A society made up of rich and poor has no mediating group either politically or economically”

– Lester Thurow (American political economist, former dean of the MIT Sloan School of Management, and author of many books on economic topics)

What constitutes the “middle class” in a given nation is dependent upon the purchasing power, educational levels and perceptions of who constitute “the wealthy”.

For those in the middle classes, the earnings generally lie in the range of US $10 to $100 per day. The middle class in many countries has been defined as those with incomes ranging between 75 percent to 125 percent of the median income.

A Pew Research Center analysis finds that the global middle class encompassed 54 million fewer people in 2020 than the number projected prior to the onset of the pandemic.

In percentage terms, 17% of the global population could be considered middle income in 2020. Most people in 2020 were either low income (51%) or poor (10%), while nearly 15% lived at an upper-middle-income standard and 7% were high income.

Since India’s 1991 economic reforms, the nation’s annual GDP growth rate has stabilized at a more robust growth of 6 to 7 percent per year. Between 1990 and 2005, the middle class grew from 15 percent to 62 percent of the population in China. In India, 50 percent of the population reached this status by 2015.

During the eight-year period between 2004 and 2012 (under UPA-1 and UPA-2 rule), the middle class doubled in size from 300 million to 600 million. By 2015, the size of the middle class in India was between 300 and 600 million, according to Deutsche Bank Research.

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. Despite many odds, the Indian middle class has played a valuable role in the country’s economic development.

Eight years back when Prime Minister Narendra Modi took his oath for the first time, he had promised people that their 'ache din' were just round the corner. But instead of nurturing the middle class, who are the vocal supporters of his government, PM Modi has chosen a path of political expediency that favors rent-seeking, but is actually hurting his most vocal supporters -- the relatively affluent middle class.

Firstly, Modi government slashed corporate income taxes, but kept personal income taxes unchanged. This is adversely affecting the ability of middle class to buy goods and services. For many middle-income earners, those goods and services that they want to buy have also been put out of their reach, due to the high goods and services tax (GST).

Under-allocation of funds for public services such as education and health care is another factor forcing middle income households to opt for expensive private sector options, which further squeezes their disposable incomes.

Then there are raised import duties on several tariff lines that the Modi govt has introduced since 2014. This makes it harder for middle income households to buy things like laptops, mobile phones, and air conditioners.

High inflation is also eroding the purchasing power of Indian middle class. The retail inflation was at an eight-year high of 7.8 per cent in May'22. LPG cylinder prices have almost doubled in the last 8 years.

According to some estimates, the excise duty on petrol and diesel was increased 12 times between May 2014 and September 2017, and furthermore in the succeeding years. Food prices are soaring like a rocket.

Lower interest rates may have helped debt-laden crony capitalists pare down the cost of servicing their bank loans. But in a country like India where bank deposits and govt small saving schemes remain the most important instrument of financial savings for middle-income households, low-interest rates have created a negative wealth effect.

The unemployment rate remained at 5.4 per cent on an average from the time the Modi government assumed power till 2017. However, with pandemic and lockdowns ravaging the livelihoods of people, unemployment rate spiked to over 8 per cent in 2020. Consequently, the Indian middle class has stopped growing under Modi government.

According to Pew research, the middle class shrank by 35 million, while the number of people who were pushed to poverty was 75 million because of COVID-19 pandemic led recession.

On the whole, India's middle-class are at the receiving end during the last 8 years.

(The writer is an alumnus of IIM, Ahmedabad and a retired corporate professional. Views are personal)

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Published: 11 Jun 2022, 7:43 PM