Union Budget 2023-24: What middle class expects from finance minister Nirmala Sitharaman

By Varna Sri Raman
A few days ago our finance minister Nirmala Sitharaman stated that she empathised with the middle-class and their pain stating that she belonged to the middle-class herself.
She was referring to the feelings of the average middle-class household in India, that every financial year finds itself between a rock and a hard-place, with no tax-relief from the government and inflationary tendencies in the economy.
It is hard to believe that our finance minister understands what the middle class goes through though her own personal assets declaration to the Election Commission of India is at Rs 2.6 crore and her salary is Rs 2,00,000 every month.
In developing economies, the distribution of socioeconomic classes can best be graphically represented by a skewed distribution to the left of a distribution curve (the majority is poor) as opposed to more of a bell curve for richer nations.
Going by this definition in India, the middle-class statistically speaking is that Indian who earns between Rs 200,000 to 500,000 per year, clearly our finance minister whose monthly income is the same as the annual income of middle-class households is not in the “middle” we understand.
According to India’s premiere Consumer Pyramids Household Survey (CPHS) put together by CMIE, middle-class households account for half of India’s total households and also half of the unemployed and the largest number of unemployed people. Despite a clear economic and demographic ‘location' the middle class is a somewhat amorphous entity as far as classifications go.
In India, being "middle class" is something of a good thing in that it includes within it the idea of aspiration and growth, and yet is also something of a discomfort in that it appears to be that class of people, who work as hard as the poor belaboring class, and yet don't quite possess all the purchasing power that a member of the elite class might have.
Far from being just an income bracket, the middle class is those who are dependent upon their growth and achievements as defined by their purchasing power, educational levels, perceptions of who constitute "the wealthy," and levels of social services among other factors.
During the eight-year period between 2004 and 2012, the middle class doubled in size from 300 million to 600 million. In 2015, fewer than 19 per cent of Indians lived below the poverty line, nearly a 10 per cent reduction from 22 percent in 2011.
The Indian household savings rates also tripled between 2005 and 2015, with many more households having a significant disposable income. By 2016-2017 and in early 2018 approximately half of India's population of 1.3 billion was in the middle class, within this group the fastest growing incomes was those of the "lower middle class" who earned between $4 to $6 a day according to international estimates. This group managed to save up to a third of their incomes to spend.
Despite this there were concerns starting to show up in the later part 2018 about India's "middle class opportunity". Whispers in the boardrooms of larger corporations such as Amazon and Apple who were banking on the McKinsey style "Indian golden bird" to fly were starting to suggest that the Indian middle class while large also masked large income inequalities. Piketty's graphs were starting to become a persistent thorn in the India-growth-story enthusiast's side.
Ultimately the great Indian middle-class story was cut short rudely by the pandemic. Before the pandemic, 99 million people in India were expected to belong to the global middle class in 2020. However, after one year of pandemic, that number was reduced by a third, to 66 million people.
The shrinking of India's economy as a whole by a whopping 7.3% in 2020-21 with its falling employment, wages and the incomes catastrophically struck middle class households. Even though the economy is now open the cracks in the middle-class existence are yet to heal.
The Oxfam India’s supplement to the Global inequality report this year points out what Piketty’s wealth and income inequality graphs did a long time ago. Which is that not only is India’s wealth inequality the result of disproportionate wealth being concentrated in the hands of the rich but also the result of a taxation system that is stacked against every class other than the rich. Wealth inequality is not a rich versus poor issue it also affects in a very real way middle-class aspirations and existence.
How do the rich obtain and maintain their wealth? Unlike the rest of the middle-class who subsist on monthly salaries and jobs most of the rich are wealthy by inheritance and endowments. Others are business Moguls. As any chartered accountant will tell you, it is much easier to save taxes in business (take a look at the GST set-off system) than in a salaried role.
Dividend income and income from capital gains when held over a longer-term are, in fact, taxed much less than salaried income. The burden of consumption destination taxes is also borne by consumers many of whom are the middle-class. The rich also do not hold liquid wealth—you will be very hard pressed to find the really wealthy with fixed deposits.
Instead, the wealthy hold their wealth in property. Now property sale is taxed quite reasonably so long as it is held for two years or more (only 20%) along with benefits of something called “indexation”.
What that means in English is that the selling price can discount for cost of living or inflation during the years of property holding, thus making the tax on profit made even lower than 20%. Another favourite way to hold money, for the wealthy, are in debt mutual funds or in gold both get the same benefits provided they are held for three years or more.
Now consider this, the middle-class can rarely afford to hold investments for such long periods of time simply because personal disposable income is hard to come by in a salary, you just don’t have that much of a corpus. The middle-class instead puts its money in shorter-term fixed deposits or mutual funds both of which attract the prevailing marginal rate of tax and short-term capital gains tax, but gets no inflation benefits. However, a corpus for the wealthy is fairly easy.
Further, the tax system favours gig-work over social security led permanent employment by making contractual work much more lucrative on the tax front as opposed to being in the highest salary-bracket. Successive budgets by the current government have done little to help the middle-class. For example, a new tax regime which is simpler for the middle-class, only results in much higher-taxes on average, when compared to the older more complex system thus disincentivising its use.
Budget after budget has resulted in no middle-class friendly changes. The middle-class, could, for instance, benefit from a tax break on education as a separate chapter in the Income Tax Act outside of 80C as it is hardly a trivial expense to educate a child.
Similarly, there has been no limit increase in tax exempted income despite lay-offs, inflation and increases in cost of living for the middle-class. India’s taxation system and economy is structured to perpetuate income and wealth inequalities, in favour of the rich and unless this changes to a more equitable playing field there remains little that anybody but the rich can look forward to in India.
(The author is an award-winning researcher, with two decades of experience in social research and global development implementation.)