A tale of two middle classes
The growing power of this segment is catchy and pretty much overused. The way you deal with them sets directions for consumption, taxes, government spending, etc
Let’s discuss the relationship between consumption, subsidies, taxes, inflation, unemployment, and the middle- class. My all- time favourite examples are those from the post First World War era, for many economic reasons that the word limit here does not permit me to list.
Because of the situation then, the exceptional inflation levels in Germany were unique because of its effect on the middleclass. Inflation dilutes anyone’s wealth, and this is exactly what happened. Not only were they affected by tax hikes to fund the German government expenditures, but inflation made whatever they held so negligible compared to other currencies.
Wealth cannot be measured in absolute values, and instead there has to be a benchmark to know what the right worth is. Unfortunately for the German mark back then, it didn’t enjoy full penetration into markets nor did it act as a world’s currency reserve.
Speaking of which, a recent article referred to the dollar as the currency that can never be truly valued because, if it’s the world’s currency, what can you benchmark it with to measure its worth? Yeah, so technically don’t speak of its devaluation.
The growing power of the middle- class is catchy and pretty much overused. It is true, however. The way you deal with middleclass citizens sets directions for consumption, taxes, government spending, etc.
This is probably the reason why when taking any decision, it is very important to consider the effect on them. That does not sideline any other group, but it only emphasises their importance.
In India, the current number of middleclass households stands at 50 million and estimated to grow to 583 million by 2025 according to an article in Business Week. This will be around 41 per cent of the population, with the combined households’ income growing to around $ 1.1 billion.
The study divides the middle- class into two groups. They are the ‘ Seekers’ who could be university graduates with annual incomes of $ 4,376 to $ 10,941. By US standards this falls below the poverty line, though it fully utilises India’s lower cost of living. The second group are referred to as ‘ Strivers’, who are the upper end of the middle- class spectrum and made up of categories such as government officials and annual incomes between $ 10,941 to $ 21,882.
New spending powers
The challenge is to carefully manage new spending powers, which means more careful steps towards deciding on fiscal and monetary policies. The above mentioned example is of one shifting towards being in the middle- class. The following is of one being impoverished. In 2010, Iran started cutting subsidies on energy and other basic commodities which resulted in a price incline, according to an article in Financial Times. The parliament then required the government to give out monthly cash handouts to help out those impacted. The first move saved $ 11.2 billion while the second cost $ 16.1 billion as the handouts were extended to 76 million Iranians, adding only to the unofficially announced deficit of $ 28 billion.
The increased spending due to handouts, coupled with the increase in prices because of subsidy cuts, has fuelled an estimated annual inflation of 40 per cent and caused a fall in the rial by 50 per cent since 2012. The gap between amounts saved from subsidy cuts and what’s spent on handouts encouraged the drop of the monthly handouts from $ 45 to $ 18, with the possibility of excluding many better- off Iranians from the scheme.
The created spending gap, the drop in rial’s value and the increasing acceptance of US dollar payments made many middleclass earners worse off. That is, people earned in depreciating Rials while they had to spend in dollars. The main threat lies in the shift of these earners towards poverty, decreasing their spending power and consumption. As a result, companies doing business will find it unfeasible and adding to existing youth unemployment rate of 28.3 per cent.
Subsidies and relaxed tax policies encourage the shift of people from poverty to the lower middle- class, and then upwards if surrounding factors allow it. Increased consumption fuels inflation, and a balance in inflation balances unemployment levels. Tax revenues thrive with the increase of a middle- class base. If these funds are properly managed by investing in projects, that would increase employment through sustainable government projects. Now the last thought that I want to leave you with is this: based on the examples given, what happens when people move to a middle- class status? What happens when people move out of it? ( Hint: an export- led growth is not sustainable, a consumption- led one is).
N e w s p a p e r D i r e c t