Over the last two weeks, a potential last assault on the poverty by the first family led political party has been doing rounds. While that sounds like a fiscally devastating plan floated by a desperate political party (which has been assaulting the poor and the middle class for the last 5.5 decades), the party claimed that they had consulted experts, who confirmed the bandwidth availability in the budget which is already choking on the deficit.
This $50bn disastrous plan which involves cash handouts of upto $1,032/Annum to millions of families (with no value added to the economy) has been contended at various levels from the ruling government to even pseudo intellectuals (you may call me one). Final assault aside, BJP came out stating that such a legroom for a ruling government requires increase in direct taxes on the Middle Class (and the Rich, but can’t say that openly).
The claim that the Middle Class will have to bear the brunt has some merit to it as UPA even committed to reducing GST and making it uniform if voted to power (a welcome commitment). So there’s gotta be some unopened coffer for this new $50bn /Annum. The coffer has to be the Middle class.
For long, I believed and maintained within my debate and friend circles that a nation’s economy rests on three blocks. The rich, the middle class and the poor. If you imagine the economy as a vertical block diagram with three blocks, the rich (upper block) tries to pull the economy upwards while the poor (lower block) applies pressure downwards (thanks to the populist schemes which offer freebies and loan waivers — strictly economic angle). In a country like India, where the lower block is heavy, it is natural that the upper block has little power to wield any substantial force upwards. So if something has to counteract the downward forces, Middle block is the key. For times immemorial (USA and now China), Middle Class has always decided the fate of the economic curve. Treated and pampered well, the lower block finds it conducive to integrate itself with the middle block and hence push for integration of the middle into upper.
But the biggest undoing is the vote bank politics which is intertwined with the blocks I wrote about. It will be safe to say that political party/ies have been content with the heavy lower block remaining the same or add more weight to itself with populism, as they understood that the number of fingers pointing at them are busy counting freebies. This made it conducive for the ruling government to continue their loot.
Even if BJP’s claim of a destroyed middle class can be assumed a pre-poll myth, the fact of the matter remains that Middle class has always faced the brunt of populist politics (higher inflation and taxes), while they were supposed to have been pampered with lower direct and indirect taxes. Suffice it to say, that India is neither Socialist nor a Mixed economy. We are treading somewhere between these two, unsure how the economy shapes itself. This lack of clear ideology is a result of a large vote bank that decides its vote on the basis of cash handouts given by political parties over long term vision.
Irrespective of how many reforms are brought in like FDI liberalization, ease of doing business, ease of ECB (External commercial borrowings for companies to have easier access to foreign debt), the crux of the matter remains the unsuspecting and patient Middle class which has only seen a half-hearted effort by successive governments since independence. Barring the blip in the recent budget for the middle class, even NDA did little to boast about. The sentiment for investment which is flat (currently) when clubbed with a tepid consumer sentiment and job losses (courtesy ILFS, a potential Jet fiasco and the hyper active revolution against immigrants in the developed world) will wreck havoc to the economy if Middle class is not encouraged to consume more and create domestic demand.
So who do we trust? UPA or NDA (forget myths like Federal front or disasters like Ghatbandhan)? Going by the track record of how UPA functions, it’s safe to tilt towards the other side of the scale. Irrespective of who wins, mindless populism can’t be stopped. Middle class has always been and will be a puppet and have no time (thanks to their hard working busy lives) to question the government. This is taken as an opportunity time and again by successive governments to hammer anti-consumer policies actively or passively on their heads. It’s only during the polls that the Middle class remains on top of the agenda and they have to be more demanding.
While taxing the rich any further in the current scenario is scary (as that will only encourage further stash shipment away from Indian shores), burdening the middle class will tilt the balance towards a degrowth and all those articles/opinions about we being the third largest economy by 2040–2050 will remain a myth forever.