Frankly, Modi Alone Can’t be Blamed For Woes of Middle Class

For India’s middle-class, who will get no government subsidies or tax-cuts, there’s no hope of any Achhe Din.

In the summer of 2008, my wife and I stood outside the famed Hotel De Crillon in Paris, about a 15-minute walk from our starkly less glamorous quarters off Champs-Elysees. “The next time,” we said to each other. Around us, the first signs of panic had begun to set-in. It was the year, when the global financial crisis had engulfed the world. Yet, it looked like a temporary blip in the Long March of universal prosperity. And the future, it appeared at that time, belonged to India.

What gave us such confidence in our economic future? It was our own immediate economic history, and that of a large section of India’s middle-class. From the middle of 2004, the waves of global finance began hitting India’s shores. Big money began flowing into our stock markets. Companies raised money by selling shares to the public and spent that to expand their businesses. Banks gave loans to all and sundry to spend and invest. Roads, bridges, powerplants, airports, steel and cement plants, and swanky new apartment complexes, were built with public money and big-ticket loans. Stock prices fast outpaced earnings.

Those Were the Best Days?

All this while, companies vied with each other to attract and retain the best talent. Flush with the funds they had raised, they paid top-dollar to middle and senior management. Young professionals in their 30s earned massive salaries, and their expense-accounts and sundry allowances made them feel even richer than their pay-packets did. Upwardly mobile Indians were pleasantly surprised by how affordable everything seemed when they holidayed abroad. International airlines added more seats to their business-class section. Some added first-class cabins.

But, it wasn’t just about the free flow of funds. Getting a government contract or a big loan from a PSU-bank often required greasing the gears of power. An entire edifice of power-brokers and middlemen appeared in India’s cities, hanging about in five-star hotel lobbies to work out deals between corporates, babus and netas. This was the period of untold generation of black money. Some of it was routed into shell companies, some took the hawala route, and then came back to the Indian markets through anonymous ‘Promissory Notes’. The then SEBI chief repeatedly tried to crack down on such investments, because he believed they artificially boosted stock prices, way beyond their intrinsic value. His voice was lost in the irrational exuberance of the rising value of middle-class investments.

Black Money & Trickle Down Effect

A larger part of the black money got parked in real estate. This caused the mother of all property bubbles, making homes inside our cities unaffordable for virtually everyone. Property as wealth was so out of phase with property as income that one could rent a house for a fraction of the mortgage required to buy it. But, the promise of future riches made middle-class families take out home-loans to invest in upcoming projects in the suburbs. Tracking and comparing property prices made for popular party conversation.

Of course, all of this only affected the top 10 percent of Indians. But it did have a trickle-down demonstration effect.

Especially on, what Indians like to call, their ‘staff’ – domestic helps, drivers, guards – who vicariously experienced how the rich lived. These members of India’s poor and lower middle-class hoped for a better life one day, if not for themselves, at least for their children. Middle-class benefactors handed down their phones, old designer clothes, CRT televisions, old furniture to their helps. Sometimes their employees took ‘advances’ to buy things and asked money to be deducted directly from their wages. From the point of view of an affluent person, India appeared to be shining in the fast spreading light of prosperity.

When the Middle Class Bubble Burst, It Brought a Govt Down

Then suddenly, in early 2008, the bubble burst. Finance withdrew overnight. The Sensex which jumped from less than 5000 in the summer of 2004 to 21,000 in January 2008, crashed to almost one-third from its peak. Property transactions came to a standstill and even though prices didn’t collapse, they stopped appreciating. White-collar jobs dried up, hiring froze and many companies cut salaries. The middle-class suddenly found their income and wealth begin to shrink.

Things would have fallen apart completely had it not been for the massive spending by the Manmohan Singh government and the mega loans given by public-sector banks in the first couple of years. This sustained domestic investments and consumption till 2011. But, after that, the middle-class sensed life would not be the same again.

The anger and frustration with, what was perceived to be, a failure of the UPA government, spilled out onto the streets – in the form of the Anna movement, protests against the Nirbhaya rape, public opposition to the commonwealth, 2G and coal scams.

The same middle-class which had happily paid cash to buy property, was raging against the Congress party’s corruption.

Then towards the end of 2013, Narendra Modi appeared as the strongman India needed, with his promise of cleaning up India and bringing back Acche Din. In reality, there was no way to re-inflate a balloon that had already burst. India’s ‘booming’ economy that the world had talked about was only about the top 20 percent people. The rest gained nothing from a decade of high growth. In fact, throughout the 2000s, employment growth was lower than what it was in the 1980s and 1990s. An economy that produces only for the rich cannot sustain itself for long.

Why Indian Middle Class is Yet to See the Worst

Since Modinomics broadly continued on the UPA’s economic path, it was bound to fail. If anything, demonetisation and GST made life even more difficult for India’s middle-class. Modi sarkar’s focus on winning votes through handouts to the poor, meant that those who had been pushed to the margins of the economy were slightly better off. But, their consumption levels were so low that government expenditure couldn’t boost overall demand in the economy.

The government knows that the Indian economy has reached a tipping-point. The only sustainable long-term solution to India’s economic crisis is to redistribute wealth, change our production priorities and expand consumption beyond the top 20 percent of Indians. This is bad news for the middle-class. It has faced adversity for more than a decade now, interspersed with short bursts of hope. Now, the government is saying don’t ask for more. Become atmanirbhar and take care of your less privileged fellow-citizens.

Businesses and consumers are being encouraged to take loans to fend for themselves. But, who indeed will borrow money when they aren’t sure that they can ever repay it? Only those who are desperate. Or those who have no intention of ever honouring their debts. Armed with government guarantees, banks will lend to riskier borrowers, and the taxpayer will end up paying for defaults.

All of this will fall on the over-burdened shoulders of India’s middle-class, who will get no government subsidies or tax-cuts. For us there’s no hope of any Acche Din.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)