class politics in India

["Ian Murray" <seamus2001@xxxxxxxxx>]

< http://www.outlookindia.com >

The Indian Middle Class Caged
And not in a gilded one either, with a funds-hungry government
squeezing it from both directions
Paromita Shastri

You wonder why common sense isn't more common. And why budgets
always mean more money out of your pocket. And what the government
gets out of taxing the same set of people more and more. And why
the babus with their furnished bungalows and green lawns and
foreign study tours cut the yield on your pathetic little savings
every year. And why it is that the more you hear of liberalisation,
the more you feel hemmed in in your pitiable rushed 9-to-6
middle-class existence. And you fret till the bile rises and all
you feel is rage towards the faceless bandhgalas rusting in and
around those huge bhawans and Parliament.

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.



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