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In recent times, there has been a growing awareness among the Indian populace regarding the financial struggles faced by the middle class. This realization was highlighted during a recent GST Council meeting where the Finance Minister announced varying tax rates on popcorn, leading to widespread ridicule on social media. However, the issue at hand is far more profound than just the taxation of snacks; it reflects a systemic problem affecting the very fabric of the middle class in India.
The Decline of FMCG Sales
The financial health of the middle class can be gauged through the performance of Fast Moving Consumer Goods (FMCG) companies. Hindustan Unilever, India’s largest FMCG company, reported a 3.86% decline in profits compared to the previous year. This trend is echoed across the industry, with other major players like Nestle and Tata Consumer Products also noting a decrease in urban demand. The crux of the issue lies in the shrinking middle class, which is increasingly unable to afford basic necessities due to rising costs and stagnant wages.
Defining the Middle Class
To understand the plight of the middle class, we must first define who they are. According to businessman Kishore Biyani’s framework, India can be divided into three segments:
- India-1 (Upper Class): Approximately 120 million people with a per capita income of ₹1.23 million per year, accounting for 50-60% of consumption.
- India-2 (Middle Class): About 300 million people with a per capita income of ₹250,000 per year, representing the aspirant class.
- India-3 (Lower Class): The largest segment, encompassing the poor with no savings.
The middle class, once a significant consumer base, is now struggling to make ends meet, leading to a decline in their purchasing power.
The Tax Burden
The middle class is bearing an increasingly heavy tax burden. In the financial year ending March 2024, only 22.4 million Indians paid income tax, representing a mere 1.6% of the population. This small fraction is responsible for 30% of the government’s tax revenue. In contrast, corporate tax contributions have decreased significantly, from 58.3% of direct tax revenue in 2018-19 to just 46.5% in 2023-24. This shift indicates that the middle class is disproportionately shouldering the tax burden while corporations benefit from tax breaks and incentives.
The Impact of Inflation
While corporate profits have soared, the salaries of the middle class have stagnated or even declined in real terms. Over the past five years, inflation has averaged 5.7% annually, outpacing salary growth. This disparity has led to a situation where the middle class cannot afford even basic goods and services, as evidenced by the rising costs of essential items and services.
The Role of Corporations
Despite record profits, corporations are not investing in employee wages or job creation. The government has reduced corporate taxes, leading to a loss of ₹9 trillion in revenue over five years, which could have been allocated to public services like healthcare and education. Instead, the burden of funding the government has shifted to the middle class, who are now paying more in taxes than corporations.
The Cost of Living
The rising cost of living is another significant factor contributing to the struggles of the middle class. For instance, the tax on cars can exceed 50%, with the government earning more from the sale of a vehicle than the manufacturer. Housing prices have skyrocketed, with average prices in major cities increasing by 23% in just one year. Additionally, the cost of education, healthcare, and everyday necessities continues to rise, further straining the finances of the middle class.
The Disparity in Taxation
The taxation system in India is regressive, with the bottom 50% of income earners contributing over 60% of GST. In contrast, the wealthiest 10% contribute only 3-4%. This inequity highlights the burden placed on the middle and lower classes, who are paying a disproportionate share of taxes while the wealthy benefit from loopholes and tax havens.
The Future of the Middle Class
The ongoing economic challenges faced by the middle class pose a threat not only to their financial stability but also to the democratic fabric of the country. Research indicates that a strong middle class is essential for maintaining democracy, and as their numbers dwindle, the risk of democratic backsliding increases.
Conclusion
The middle class in India is at a crossroads, facing unprecedented challenges due to high taxation, stagnant wages, and rising costs of living. As awareness grows, it is crucial for the middle class to unite and advocate for policies that address these inequities. The government must recognize the vital role of the middle class in the economy and take steps to alleviate their burdens, ensuring a more equitable and sustainable future for all.