Middle class is addicted to Modi: Slowing growth, stalled reform & oppressive taxes don’t matter

Indian middle class seethes at the growing phenomenon of political parties taking their tax money and spraying it among the more numerous poorer classes to buy their votes, but...

Shekhar Gupta

India’s economic engine is slowing and screeching and the ones hurting the most are the vast middle classes. Why the BJP doesn’t particularly worry about this, or why the party can still take them for granted, we will return to in a bit. The larger crisis first. It isn’t merely the function of one bad quarter. The central government’s statistical organisation, the Reserve Bank of India and global organisations have all scaled down this year’s growth estimate to around 6.5%. There’s little evidence that a turnaround is around the corner. Economics is complex for me. It is safer for me to bat on the pitch I am more familiar with: politics and public opinion. First of all, the air of optimism, the all-conquering ‘India has arrived’ spirit is now ebbing. The ‘hawa’ (what we say for vibe) has changed.

The millionaires are buying assets and residencies overseas or long-term visas that come with them. There is plenty of data already in the public domain on Indian millionaires shifting overseas. Over the past two years, the average is 5,000, according to the Henley Private Wealth Migration Report. You’d never hear these wealthy complain. They are too smart to take such ‘pangas’. They are simply voting with their feet. The fact is, they have surpluses and rather than invest in India, they’d move them overseas. It’s all perfectly legal and so many are leaving that there is safety and anonymity in numbers. What are the even richer ones doing? Let’s leave the fleeing millionaires aside and leapfrog to billionaires, or even more specifically, dollar billionaires. Most, if not all of these, would be entrepreneurs. It isn’t even that many people. According to the latest data from Forbes, these are only 200 in number. If the millionaires are quiet and leaving, the billionaires are the opposite.

They are speaking, often loudly and volubly praising the government, parroting its “fifth largest economy and third soon” and “fastest growing large economy in the world” mantra, and staying back in the country. It is just that they are not investing and not because they have no love for India. This is despite being repeatedly chided by the finance minister. It is just that if smart entrepreneurs see no demand, what should they invest in and why? It isn’t their burden to pull out their shareholders’ reserves and build assets nobody would use or goods nobody will buy. Which brings us to the nub of the problem. Why the demand collapse? Much of the demand, ultimately, comes from that largest consuming demographic in the country: the middle class. Again, it is a tricky definition, but let’s make a wide sweep and describe the middle class as anybody who would normally have some surpluses to spend on something more than basic subsistence, which includes food, children’s education, housing, health and basic mobility. It is that wide class, ranging from, say, those earning Rs. 12 lakh to Rs. 5 crore per annum that is simply sitting back and hurting.

They aren’t rich enough to emigrate legally along with assets, are taxed at high rates, and have also seen their investments lose value over the past year. Fun fact: the richer among them, say those earning Rs. 2 crore and above, pay almost twice as much tax by percentage of their incomes as the top corporates or multi-billionaires. These are the self-made, usually first generation, aspirational newrich who were fuelling the India story.

Today, they are taking hits as if from a multi-barrel rocket launcher. Fuel prices continue to stay high, income taxes are oppressive, you hear from them a rising clamour that the state gives them too little in return for their taxes. Their tax breaks on mutual funds, equity, property capital gains and bonds are vapourising. They are also hit by rising costs in areas that may not be captured in our headline inflation figures. The rising costs of private education or eduflation for their children, for example. They are the ones hurting, not buying, postponing consumption and primarily responsible for the disappearance of demand.

The Prime Minister said the other day that Indians buy about 2.5 crore cars in a year, which is more than the population of many countries. That’s true. When you check out, however, who’s buying—the lower end cars have inventories piling up while the premium ones have waiting lists—you know how fatigued the middle classes are. As they see how the new politics is unfolding around them, they are infuriated. They seethe at the growing phenomenon of all political parties, now with the BJP in the lead, taking their tax money and spraying it among the more numerous poorer classes to buy their votes. Over the past 11 years, BJP governments have distributed about Rs. 20 trillion already as straight giveaways, including free grain and now this gravy train is running on a double engine. That’s because all of the electoral politics in the states is now purely transactional. This is how much I will pay for your vote.

This politics is Robin Hood with a twist. At least the original robbed the rich and distributed to the poor. The Modi governments have been soaking the middle class and giving away to the poor. While at the same time, the superrich, especially the richest, enjoy the lowest taxes ever. The wide middle class is the biggest, most loyal and vocal supporter of the Modi-BJP politics. All elections since 2014 have shown the BJP sweep the major and medium-sized cities except in the South, where the party is fundamentally weak. In a state like Haryana, the BJP has risen from zero to hero, partly because of rapid urbanisation. And how has the BJP responded? By relegating 75% population of India’s third richest large state by per capita income below poverty line.

Check out this story by Sushil Manav of The Print. This, while the Centre and the BJP proudly claim that India’s overall poverty rate has fallen below 5%. How do you square the two? The answer lies in today’s politics. If you win elections by distributing to the poor, you have to find enough poor.

Who can win by spraying tax money over a mere 5%? That’s why the states have an incentive in creating two classes of the poor: the genuine, income-linked poor, and the electoral poor. State after state, this is the norm now. The electoral poor are often 10X of what your next Census would count as genuine poor. In this market the political class trades middle class tax revenues for votes. (Source: The Print)