The government faces a money test
The crisis hasn’t come from terrorism or gau rakshaks, but from the middle class’ expectations
It is a truth universally acknowledged that a middle class in possession of a reasonable standard of living is always in need of lots more money. So it has been with the Indian middle class. Nothing shapes the political discourse among educated Indians as effectively as money does.
Forget about agrarian distress or farmers’ suicides. Even social tensions or the dangers of growing religious fundamentalism count for less and less.
The only thing that has the power to sway middle class minds is a threat to standards of living. The unprecedented economic growth of the last two decades has led most middle class people to believe that they are entitled to make more money or live more comfortably with each passing year.
This is not necessarily something to be proud of. But it is the Indian reality. And over the last month the government has finally come to terms with this reality. The prime minister’s popularity may be intact but the middle class is getting increasingly restive. And the government is concerned.
Some of the reasons for middle class disgruntlement are minor in the context of the larger economic picture. Inflation, well under control during the life of this government, has shown a small spike. The finance minister has said that a rise from two per cent inflation to three per cent inflation is hardly significant. And he has made the point that rises in vegetable prices are seasonal, so things should return to normal soon.
But the issue has refused to go away. And it has been twinned, in the eyes of many people, with the hike in petrol prices. Global fuel prices are much lower than they were during the UPA, but the benefit of the drop in prices has not been passed on the consumer. Such duties as central excise and state taxes have been used to generate massive revenues for the government from petrol.
Predictably, many consumers feel shortchanged. If this government was going to be led by the market, as it once promised, they ask, then why do Indian petrol prices bear no relation to the market price of petroleum?
The government’s answer – that it needs the additional revenue to keep the economy buoyant – is worrying because it reminds us that private sector investment has failed to pick up after three years of the NDA. The economy now needs to be kept afloat through government spending.
More worrying still, is the consistent refusal of the growth rate to hit its targets. For most middle class Indians, the GDP figures themselves are an irrelevance. They may worry when they hear that growth has dropped for several successive quarters, but their concerns are with the effects of the slowdown and not with the figures them- selves. Why isn’t consumer demand picking up? Why are small businesses not finding the going as good as they had been promised? Why are more jobs not being created?
There are good answers to these questions. One problem with private sector investment is the mess in our banking sector, for instance. But these are complex explanations and they are not always compelling. So the consensus among talking heads on TV channels and pop economists is simple: lower interest rates.
In the past, this may have been difficult to do because Reserve Bank Governor Raghuram Rajan was mindful of the inflationary impact of a drop in rates. But now, with Dr. Rajan gone, critics ask, why can’t this be done at once?
As the clamour mounts, the Reserve Bank will probably have to drop rates to some extent. But the danger of inflationary consequences is a real one. And with less than two years to go to the general election, the government is not sure how inflation will play with the electorate. It is one thing for economists to say that inflation rates of six to seven per cent are necessary; quite another for a politician to explain to his constituents why prices are rising.
You can argue, as many in government do privately, that the middle class discontent does not matter because the prime minister has re-invented himself as a champion of the poor. But Mr. Modi is astute enough to know that he cannot ignore his original support base and he is experienced enough to realise that the mood of the middle class has a way of trickling down to the broader electorate.
So, three years into its term, this government faces its biggest test. The crisis has not come from the issues that dominate the headlines: Pakistan, terrorism, or gau rakshaks. Instead it has emerged from the one issue on which there can be no compromise: the middle class’ standard of living and its expectations.
That’s why the prime minister and the finance minister have been so busy preparing a stimulus package and may be prepared to risk increasing the budget deficit.They know that the next election will not be fought on Hindutva or development.
It will be fought on the issue where the government is now most at risk of alienating its original supporters: the economy.