Income Tax Relief Remains A Mirage For The Growing Indian Middle Class

Economists are unable to explain the phenomenon where consumption growth is running at half the level of GDP or income growth. If this is true then savings should see a robust increase. But household savings are also shrinking!

The liberalisation of the Indian economy in the 1990s was instrumental in creating a 300 million-strong middle class. They inherited democracy without actively participating in revolutionary movements – unlike their western counterparts, who historically played a pivotal role in driving social, political, and economic change in their respective country.

The rise in income tax receipts surpassing the corporate taxes comes even as the markets have been booming with the benchmark BSE Sensex rising from around 19,000 in 2012 to 80,000 in 2024.

In the last 12 years, stock markets have quadrupled, indicating that profits have gone up. But corporate taxes have gone down as a percentage of total receipts. As of October 2022, there were around 15 lakh private companies in India.

Around 10.7 lakh companies filed income tax returns for the Assessment Year 2023-24, with 5.1 lakh filing zero-tax returns and only 5.6 lakh paid taxes.

Despite the contribution towards public infrastructure and services by the middle class, which is around 31 per cent of the population, it has to be reliant on private schools and hospitals. And then there is the highway toll.

The new system was handed over to the middle class through the constitution, which contains ideas borrowed from the revolutions in the west. That lack of struggle has made the beneficiaries complacent about the values and democratic heritage they received.

Rural wage and consumption stagnation has persisted for nearly a decade now. The increasing stress in urban consumption in recent months persists in spite of a GDP growth forecast of seven per cent plus. Why is this higher GDP/income growth not translating into higher broadbased consumption remains a puzzle. Note that the official consumption expenditure data from the NSSO survey showed that consumption growth for nearly a decade is running at about 3.5 per cent annually which is half the GDP growth.

Economists are unable to explain the phenomenon where consumption growth is running at half the level of GDP or income growth. If this is true then savings should see a robust increase. But household savings are also shrinking! Some top economists have said that the only answer to this apparent contradiction is that GDP growth may be exaggerated.

The US-based Pew Research Centre projected the pre-Covid strength of the Indian ‘middle class – defined as those earning between $10 and $20 a day or Rs. 25,000 and Rs. 50,000 a month – at about 99 million.

The Pew Research’s data also said that about one-third of this segment fell out of the ‘middle class’ during the Covid freeze, effectively reducing it to about 66 million. Those numbers that fell out have probably been restored and the ‘middle class’ is now over 100 million strong.

But the estimates continue to differ wildly. Ridham Desai, Managing Director of Morgan Stanley says: “…a hundred million new households, which is 450 million people, which exceeds the population of US and the whole of Europe, are becoming middle class in the next 10 years.”

The spending splurge post-Covid and the high profits made from the exorbitantly priced premium goods saw a couple of good years for these companies; but the ‘premiumization’ strategy focused on the upper and rich segments has run of steam as, on its own, it is too small a market.

What seems to have happened is the 2-3 post-Covid years of rapid growth emboldened these companies. They got greedy and hiked prices. No decent car today costs less than Rs. 10-12 lakh. White goods prices have seen repeated hikes. No home buyer in a major city can find a decent flat for less than Rs. 50 lakh. The slowing of consumption today is nothing but a pushback by consumers.

The situation has worsened with retail food inflation persisting. Despite a fair monsoon food inflation has shot up to 9.22 per cent in September from 5.66 per cent in August. In the food basket, pulses are up 9.8 per cent, vegetables are higher by 36 per cent. This has left less money in consumers’ pockets for other optional purchases.

The middle class, the tax-paying population of India, stares at the face of the government every time the Budget day approaches. It is that neglected segment that pays both income tax on earnings and GST for spending. It is this two per cent of the entire population of India that is contributing massively to the country's infrastructure growth and welfare politics.

While the government probably has its own reasoning for taking this path, experts point to the discrepancy in the percentage of people and corporates who end up being taxed. That is why during every Budget presentation, the middle class looks up hopefully of at least a semblance of tax relief.