The Indian MiddleClass Caged

Delhi’s Rajiv Gupta thought exactly like that. His Rs 15,000-a-month income left him little breathing space after rent of Rs 4,500, housekeeping expenses of Rs 3,000 and Rs 2,500 on two children’s education. A couple of tax-free allowances took care of emergencies. So, on March 1, when his dabbling-in-politics friend scorned at his laments over the budget’s anti-middle-class content, saying that going by India’s average per capita income Gupta was actually rich, he decided to give vent to that rage. On March 24, he went to vote in the municipal polls and stamped at two places on the ballot paper. "Boy, was I glad with the results!" he smirks. "They think growth doesn’t come from the middle class. Now that we have even less to spend or save or hope for, will that give growth?"

A question that the government needs to seriously grapple with. Because the Guptas in India are growing in strength. The ruling party may have been shell-shocked into soul-searching and hasty rollbacks with the Delhi poll results (more may follow, see box) but the general cussedness continues. The middle class is not homogeneous but varies widely in spending and earning pattern. They are now close to 63 per cent of all households (180 million) in 2001-02, says Delhi’s NCAER, which conducts annual surveys on consumption and income, up from 54.6 per cent in 1998-99. They don’t just comprise the vocal urban intelligentsia; they’re almost 60 per cent of the rural households, compared to 72 per cent of the urban. A total of 886 million people, half of whom are "The Consuming Class—they buy the bulk of the consumer goods marketed in the country". What on earth was Yashwant Sinha thinking when he said that the middle class is not the engine for growth in India? Who made India one of the highest saving nations?

Make no mistake, Sinha and his colleagues top the hate list in most households right now, red or saffron, cutting right across the country. They may not have been wholly responsible for the large-scale disenchantment of the middle class but by taking the easy way out to raise resources, they have helped sharpen the edge of the anger. Says retired journalist Sibdas Banerjee: "We’re being squeezed from two directions. We are discouraged from saving as before, with interest rates going down. So we earn less even as the prices that used to be subsidised—from power to cooking gas—goes up steadily. Second, whatever little respite we had in terms of income-tax incentives are also being taken away." Asks Gupta: "Forget the rich, they own the government. And the poor don’t have a voice. But why should the middle class alone bear the burden of funding the government?"

Does the middle class do that really? Yes, as the rich hardly pay income-tax. According to North Block, only about 76,000 people earn over Rs 10 lakh a year (Rs 80,000 a month). Which means that only that many are paying taxes, the rest are either not paying taxes or have managed to declare an income way below that limit. Research organisations like NCAER believe this figure is a gross underestimate of the wealthy. How?

Just take a back-of-the-envelope example: 72,000 luxury cars sold last year. These cars cost over Rs 12 lakh each. If you were paying in instalments for five years, the EMI would be Rs 18,000 to Rs 20,000. And financiers will give you the loan only if your tax-returned income is five times that, or Rs 1 lakh a month. That’s Rs 12 lakh a year! Now even if we assume that only half of the assessees already owned a luxury car, North Block is off the mark by over 30,000! Says R.K. Shukla of NCAER, "The maximum evasion is from within the existing tax base. That is to say, most under-report their income."

But what does the all-knowing government do? Jealous of the new middle class and rich that reforms spawned, the babus take away tax incentives allowed to individuals earning over Rs 5 lakh a year, and halve it for Rs 1.5-5 lakh. That’s Rs 12,500 (tax-free with rebate) to Rs 41,000 of monthly income. In India’s metros, this middle-class earner would spend Rs 5,000-10,000 for a 650-sq-ft flat, just about enough space for his wife, two children and a widowed parent. Then there’s education, transport costs (maybe a vehicle instalment), medical expenses, entertainment and household expenses, which add up to Rs 7,000-20,000. Assume he invests up to the maximum limit in Section 88 instruments like PF, life insurance, etc (which he has to set aside from his annual income), where is the money spilling over? The latest budget has added an amazingly ironical twist to this: the person in this bracket now pays Rs 8,400 more tax, and the "rich" earning over Rs 41,000 gnashes his teeth and pays Rs 15,000 more. All for Mother India!

If you thought New Delhi was just trying to wheedle money out of the rich, spare your sympathies. Says Karvy Consultants’ C. Parthasarathy, "While the rupee increase in tax payable by a person earning over Rs 6.5 lakh could be as high as Rs 30,000-50,000, it’s a rise of 20 per cent. But for the Rs 3-6 lakh category, the rise in liability is Rs 20,000-25,000, or 75 per cent. This flies in the face of the argument that the government has been harsh on the rich."

Asks V. Mahesh Kumar, CA with Price Patt & Co, "Why should the salaried upper middle class bear the brunt while professionals get away with cash payments? That’s so unfair." Says Saumitra Chaudhuri, economic advisor, ICRA, "Doctors, you’ll find, always drive around in small cars like the Zen, it doesn’t show off their obscene wealth. It’s not enough for the government to be even-handed, it must also be perceived to be so. Our laws are not equitable and public translation of disparity is much higher today." True: an honest salary-earner sees his neighbours building palatial homes and taking foreign vacations and the psychological impact of the disparity is that much more acute.

Says executive M.S. Rajagopalan, "When things were going well, there was a buoyancy in the market, we took tough surcharges in our stride. But now things are bad, yet the middle class has been made the scapegoat again." Adds corporate lawyer Ranjeev Dubey, "The government is shifting the goalposts every year. For those of us in the mid-forties, the choice is strictly limited. All I know is I have to manage my own money if I want something out of my life." Dubey, who always depended upon bank FDs for liquidity and safety, may now invest in property: "Stockmarkets are not for those not savvy with the rules of the game." In his 15 years of working life, Zahid Pasha has never been so concerned: "Government employees have their unions to fight. We can’t even ask for a raise!"

Grumbles bitter hotel industry professional Hemant Chauhan, "The latest budget has taken away a quarter of my family income, which also includes the falling returns on my father’s savings. My plan to emigrate has only become stronger. Joining my sister’s dairy business in New Zealand may be tough in the beginning but we’ll adjust. Here, there’s just no hope." Priti Dey, who retired from the sick National Instruments with only Rs 2.5 lakh, laments: "I know many others in the same or worse plight, after the last few central budgets. No one in Delhi cares whether people like us live or die."

Perhaps to make senior citizens pray for an early death, the government cut the investment limit in tax-free RBI bonds to Rs 2 lakh, a facility since restored but not for those below 65 years. Before that, as a stagnant economy and stockmarkets diverted money large-scale from consumer markets to bank deposits, the government cut that limit too. It also made all perquisites, including company loans, taxable income. Taking the message, you’d now go to the stockmarkets or mutual funds, only there’s a 20 per cent dividend tax there. There’s no way out; the honest middle class must wring its heart out to compensate for the millions of rich evaders.

The disenchantment of the middle class finds strong support from industry, especially manufacturing (including consumer goods) whose prices have been rising with excise rationalisation or policy mismatch. Says Tarun Das, DG, CII: "The middle class, especially salaried, is worse off now. Its reaction is bound to be negative. Plus, with VRS and uncertainty, employment is going down the maximum in manufacturing." Adds Adi Godrej, chairman, Godrej Soaps, "I don’t think the budget will give growth, especially in view of the increase in direct tax rates." According to Piruz Khambatta, CMD, Rasna Ltd: "Total impact of taxes on food products including central and state taxes works out to roughly 25 per cent of MRP. This is the highest in the world."

Where does the middle class look then? Some towards a bleak future, with little savings left for the next generation. The rest, angry and betrayed, across the border like Chauhan. Or towards earning unaccounted income. Says Rajesh Verma: "So many businessmen pay no tax. How many shopkeepers give you a bill? In future, people in smaller firms will prefer their salaries in cash. Or do something on the side. They are encouraging even the straight people to join the black economy." Adds Banerjee: "What angers me is that the government penalises defenceless unorganised people and helps big industries through lower interest rates and unpaid dues of over Rs 50,000 crore of public money!"

Combined with this is the increasing frustration with poor delivery of services. Says Dr Gautam Pingle, professor of public policy at ASCI, Hyderabad: "People who pay taxes expect services in return. In India, the bulk of tax payers live in urban centres where services and utilities are breaking down. Cleaning up the state capital has been CM Naidu’s biggest PR exercise. Such actions appeal to middle-class aesthetic sensibilities." But the sarkar is sitting pretty. Whatever it does, savings in government securities won’t disappear; as long as it pays the most, the state will get the cream. Parthasarathy doesn’t see any drastic change in investment habits. But what about the unwanted long-term investment commitments? Says Amarnath Kamath, CA: "Can one get out of PPF or insurance now? The loss of faith between the governed and the government is complete."

The writing on the wall is clear. For better or worse, state sponsoring of citizens is over, except for the babus and their minions. Says Bibek Debroy, director, Rajiv Gandhi Foundation, "The middle class has for so long enjoyed Rs 33,000 crore of subsidies a year—cheap power, food, price-indexed government salaries. But if you don’t want monopoly of Indian Airlines, you cannot at the same time ask for your job and investments to be protected." Adds Rajeev Gowda M.V., associate professor, IIM-B: "The middle class isn’t politically powerless. It dominates the media and has been the prime beneficiary of policies."

Indeed, as the security net thins, fear and resentment plague the middle class. There is no safety net in India, no unemployment insurance—old age pensions and free medical facilities help only the state staff. The tax burden is close to 42 per cent of GDP in most of Europe but there’s free medical care, schooling and generous unemployment benefits. Says Kamath: "Let the government introduce a tax passbook, with the amount of tax paid by a person over a lifetime. At age 65, a share of this should return to the payee, as his social security. This will ensure compliance." But a government that can’t control its own increasing consumption can no longer distinguish between increased compliance, the real remedy for its sluggish revenues and higher tax squeeze.

Figures reflect the raw deal. Even as household savings have gone up from 76 per cent in 1997-98 to 89 per cent of total savings, gross domestic capital formation has declined from 27 per cent to 23 per cent. The government certainly has no right to tap the huge middle-class savings if it’s just frittering it away. But even as average per capita income has risen sharply over the last half century, the initial gains of the middle class from reforms have petered out.

Indeed, the moment the middle earner hits the tax bracket and raises his standard of living, he gets into a vicious cycle: rise in expenses outstrips the rise in income, more so in the current economic reality. Still, the voice is getting stronger. Says Pingle: "It’s a constituency waiting to be captured by the Opposition." If you just take the salaried, professional and small businessmen, it’s 41 million households or 220 million people, says Shukla. Adds Chaudhuri: "Even if all the tax-payers form the middle class, 25 million is a strong urban electorate, reflecting which way the political wind is blowing."

They are right. Even as the lowest class drops to 20 per cent of the population, the middle class will touch 73 per cent in 2006-07. And, at 71 per cent, the rural sector will outstrip its urban counterpart. These people will not only have a vote and vibrant purchasing power but also an educated voice. A voice strident enough to influence public policy. Even as the government slowly withers away.

With Archana Rai in Bangalore, Charubala Annuncio in Mumbai, Savitri Chaudhury in Hyderabad, Vatsala Kamat in Chennai and Ashis K. Biswas in Calcutta