EPF Cut, COVID, Inflation: For India’s Middle Class, All Roads Lead to Ruin

India's middle class needs real measures, a pat on the back is not enough anymore.

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On 12 March 2022, the Employees Provident Fund Organisation (EPFO) slashed the interest rate of the employees’ provident fund to a four-decade low for the year 2021-22 from the existing 8.5% to 8.1 %. This interest rate is only 1% higher than the last lowest interest rate of 8% declared in 1977-78.

It is interesting to note that EPFO subscribers enjoyed an interest rate of only 3% in 1952, which swelled to 7.5% by 1976-77. As India witnessed economic growth and prosperity, EPFO subscribers availed an interest return of more than 10% from the fiscal years 1985-86 to 2000-2001. The home run ended post-2001, when the EPFO slashed the rates below 9.5%. The lesser the interest earned by subscribers, the higher the impact on their accumulated retirement funds. It is a losing race for the common person against an average yearly inflation of around 7%-8%.

Since the last across-the-board tinkering of individual tax slabs in the Union Budget of 2012-13, there has been very minor relief for the middle class falling across three tax slabs. Minor adjustments were introduced in the Union Budget of 2017-18, when the existing rate of taxation for individual assesses with income between Rs 2.5 lakh and Rs 5 lakh was changed to 5% from 10%.

It’s been a decade since the diverse set of taxpayers have been given any major relief by successive governments. However, the government pleased the business community with attractive cuts in corporate tax.

To encourage spending in a battered economic situation post-COVID-19, all taxpayers must be invited to splurge on the economy with lucrative tax cuts. High income taxpayers in the highest tax slab of 30% must be encouraged to spend more.

The Concept of Savings Is Under Threat

India has withered several economic storms in its post-independence history due to its savings culture and successive economic reforms, which helped save the country from certain ruin. However, the basic concept of savings is under threat since the dwindling interest on savings deposits continues to be a cause of concern for the middle class at the bank.

The interest rates are being consistently reduced by the government since 2016. The popular Senior Citizen Savings Scheme (extendable to seven years) was launched in 2004, and was dedicated to the aging senior citizens to help them earn higher interest than the regular savings rate.

The Manmohan Singh government announced an attractive inaugural interest rate of 9% for the fiscal year 2004-05, and from 2011-12 to 2015-16, the interest rate on the scheme swelled to 9.3 %, after which the savings interest rate fell to 8.6% from April 2016 onwards. The interest of the senior citizen scheme currently stands at 7.4% as on the quarter ending March 2022. The savings rate has fallen from 9% to 7.4% in less than five years, nearing the levels of yearly inflation, which has caused heartburn for senior citizens who earn their livelihood through their bank savings and fixed deposits.

An interesting fact to note is that despite the daunting financial crisis of 2007-08, the global financial meltdown, and the US economic fallout, the Manmohan Singh government increased interest rates of five-year time deposits from 7.5% to 8.3% in 2011.

The current government’s pet scheme, the Sukanya Samriddhi Account Scheme (Under Section 80C of the Income Tax Act, 1961, tax benefits of up to Rs.1.5 lakh are provided for contributions made towards the scheme), launched on 22 January 2015 under the aegis of the “Beti Bacho Beti Padhao” campaign, has undergone a similar trajectory. The scheme began with an inaugural offer of 9.1 % savings rate in the fiscal year 2014-15, but has now severely tapered down to an interest of only 7.6%. Drastic reduction of 1.5% in interest earnings brings the scheme contribution to yearly inflation levels.

Soaring Fuel Prices

Fuel prices have become a cause of concern since the last year. As of 15 March 2022, the cost of a litre of petrol is Rs 95.41 in New Delhi, while the diesel price is Rs 86.67; in Chennai, petrol is Rs 101.40 per litre, while diesel stood at Rs 91.43 a litre. The price of petrol in Mumbai is Rs 109.98, while diesel was Rs 94.1. In non-metro cities like Patna, Jaipur, Thiruvananthapuram and Bhopal, petrol prices are above Rs 100.

The Centre and states trade blame to cut Central and states' taxes. The crisis in Ukraine and the offer of cheaper Russian oil have kept the fuel prices on edge, but they are on the verge of soaring to record levels. The Aviation Turbine Fuel (ATF) price was hiked by Rs 4,481.63 per kilolitre (5.2%) to Rs 90,519.79 per kilolitre on 17 February 2022, which directly impacts the pricing of plane tickets for the middle class.

The bleeding oil marketing companies are biding time to increase the prices at the government's nod. With no election around, the middle class is bracing for an impending oil shock.

The middle class felt the squeeze further when non-subsidised LPG further upset their carefully managed monthly budgets. The price of LPG in May 2020 was Rs 581.5 in Delhi, but it rose to Rs 884.5 by the end of 2021. As of today, the prices stand at Rs 899.50, Rs 926, Rs 899.50, and Rs 915.50 in Delhi, Mumbai, Kolkata, and Chennai, respectively.

A Slew of Charges at the Bank

The country’s largest bank, the State Bank of India (SBI), announced that it will levy charges ranging from Rs 15 to Rs 75 for the "additional value-added services" with effect from 1 July 2021. The bank also added that the first 10 cheque leaves will be free of cost in a financial year. Thereafter, 10-leaf cheque book will be levied Rs 40 plus GST; 25 leaf cheque books at Rs 75 plus GST and emergency cheque book will attract a charge of Rs 50 plus GST for 10 leaves.

To add to the woes of the middle class, banks charge a 'transaction decline' charge each time a person without adequate balance in his/her account tries to withdraw cash from an ATM or uses debit cards to make a payment, at Rs 25 plus GST. A mere printing of a bank statement at the bank and a cash withdrawal above the free limit attract high charges.

Cryptocurrency's Controversial Rise

While the Indian middle class rushed to join the global fad of volatile cryptocurrencies, the Union Budget of 2022 introduced some checks by refusing to legalise cryptocurrencies and imposing a 30% tax on the gains/earnings, along with a 1 per cent TDS (tax-deductible at source) for each transaction. As of March 2022, as many as 750 million Indians have invested a value worth more than Rs 7 lakh crore in cryptocurrencies.

Though India was late to join the crypto bandwagon, the decline in incomes due to COVID-19 encouraged the middle class to eagerly invest in digital currencies in 2021.

Numerous cryptocurrency users on social media have claimed to have earned daily cash by trading in digital currencies, which has helped them pay for their monthly household expenses. The harsh tax of 30% now threatens such earnings.

A study on yearly retail inflation shows that the average inflation rate lies around 7.21% from the years 1958 to 2021. Since the fiscal year 2012-13, the country has witnessed high inflation to the lows in 2017-18 to the median in 2020-21, which has upset the household budgets of the middle class across the country.

The national barometer is the rise of milk prices by Mother Dairy in north India, which in its latest revision has increased the price of 1 litre of milk by Rs 2. The price of essential mustard oil is hovering around Rs 200 a litre, which had risen from Rs 124.1 to Rs 167.1 in the calendar year January to December 2021. The prices of other edible oils have seen a similar fate. FMCG inflation in categories like tea and pulses have put a burden on the middle class since top FMCG players have increased their prices by 7-10% in 2021 alone.

The Middle Class is Left With Few Options

All roads for the hapless middle class reach the dead end of the Indian stock market. With term deposits, fixed deposits, retirement schemes, pension schemes and post office schemes offering returns below the rate of inflation, the middle class has dangerously few options left to invest money to save and have a fighting chance of beating inflation.

The exceptional bull run at the bourses have led to fresh retail investors to investing in droves in mutual funds, IPOs, and shares, since 2019. Despite the economic situation or the COVID-19 pandemic, stock markets have remained a ray of hope.

The Sensex, which climbed to a high of 61,000+ points on 14 January 2022, has seen a steady decline in the past two months despite the booster Union Budget of 2022, growth in FMCG sectors, better profit results of top companies and a gradual decline in COVID-19 cases.

The looming threat of a prolonged war amid the Ukrainian crisis may keep the stock market a miles away from a record-breaking bull run. If the stock market does not rise sooner, the middle class will have no light at the end of their economic tunnel.

The Prime Minister and the Finance Minister have rightly appreciated the role of the middle class as honest taxpayers. The middle class has reached a psychological dead end with no room to stretch. The government must embrace them in subsequent fiscal measures so that they make a triumphant comeback post the horrors of COVID-19, which impacted their livelihoods, businesses, jobs, and basic existence.

Diverse avenues of income must be presented to the middle class to earn returns higher than the yearly inflation rate. A middle class without savings will be detrimental for the country in the longer run. The gains made by the economic masterstroke of liberalisation of 1991, which created the exceptional Indian middle class, must not be undone. A pat on the back is not enough anymore.

(Dhiraj Kumar is an author, writer and columnist. He writes on business, economy, governance, entertainment, current affairs, politics, sustainability, and climate change. He can be reached @authordhiraj and the repository of his articles can be found on his website www.thedhirajkumar.com. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)