Inequality of wealth a huge problem in India

Missing middle-class

The middle-class, as we know it, doesn’t exist in India:

Indian adults

1. Top 1% (8 million), each makes US$20,000 a year (min) Hong Kong (in population and average income)

2. Next 9% central Europe (in middle of global wealth pack)

3. Next 40% South Asia poor (not unlike Bangladesh and Pakistan)

4. Remaining 50% (500 million) like among the poorest in Africa

So, India is no China. It’s often reported that India today counts 300 million as middle-class – but most of them earns only US$3 a day. Chances of India developing a middle-class to match China is throttled by growing inequality. Between 1980 and 2014, much of the extra income generated by rapidly rising GDP went to the top 1% elite (the rich are now 10x richer than in 1980; while the median didn’t even double its income; the poor also gained but from a very low base).

I am told eight in 10 Indians cite inequality as a huge problem, on par with corruption. The grand swell of Chinese middle-class (which was created by becoming the factory of the world) cannot be repeated in India because of heavy bureaucracy and poor logistics.

Bear in mind, only 3% of Indians has been on an aeroplane; only one in 45 owns a car or lorry. Even for the top 10% of Indian earners, only one in 10 can afford the latest iPhone. The workforce is woefully unproductive (its poor education system produces workers fit only for menial work).

So, businesses hoping for an Indian middle-class to provide the next sprint of growth should be under no illusions.

What then are we to do

It is often said that India is a country that disappoints both optimists and pessimists. Still, its experience offers valuable lessons for Malaysia:

(i) Modi swept to power (not unlike Tun Dr Mahathir Mohamad) on the cusp of change, with a strong mandate to reform. He built high expectations for bold measures. As I see it, he could have done anything he wanted. Yet, growth and reforms have fallen short – he should have done far more to unshackle the nation’s economic potential. I view Modi (like Trump) as having little appetite for reforms that could erode his popularity.

He did try to revise India’s controversial 2013 land acquisition law, only to pull back after outcry from farmers. He simply missed the boat. The economy and his coming re-election now appears headed for a fierce contest.

(ii) Modi’s boldest move so far was also his oddest: the twin shocks of his draconian cash ban and a difficult transition to an onerous GST. The vast informal economy was severely disrupted, jobs were lost and growth badly hit. It does appear that government faces a hazard if it does too much: it destabilises and disrupts too much; and costs become too painful. Backlash follows. What’s targeted to hit the fat cats, ended up hitting everyone, especially the poor.

(iii) The impact of Modi’s demonetisation and new GST has made it much tougher now to revive the investment cycle back-up. Under duress, Modi had to give up much of the gains that it could ill afford.

(iv) Reflecting the new skittishness, both supporters and detractors tend to correlate the economy’s up and downs with Modi’s action or inactions. Time is no longer on India’s side, as the world economic climate has now fast turned volatile and more uncertain. Opportunities lost just won’t return.

The lesson: Must make hay while the sun shines. Regardless, there is an urgent need to act decisively on reforms. Just do them. Period.