With growth slowing, the number of ‘aspirers’ who will move to ‘middle class’ status will fall dramatically
That the next few years are extremely crucial for the Indian economy hardly bears mentioning. Given the state of the economy, the extent of indecisiveness plaguing the system and the unstable, convoluted political environment, it is not easy to predict how the coming years will unfold. One can only guess which way the winds will blow during this tumultuous period. Although one can argue that there is a unanimous consensus across the board that the slowdown in growth must be arrested, it is quite likely that, in the immediate future, political compulsions will dominate over sensible growth-oriented policy decisions. Inaction or worse fiscally profligate populist measures heighten the risk of us being stuck at what is now been referred to as the new normal of 5% to 6% growth.
Politics will, to a large extent, play a crucial role in determining how the next few years will play out. With the threat of elections looming large, a scandal-plagued UPA is desperately trying to change the narrative. The recent efforts to kick-start the reform process and bringing food security ordinance can be seen in this respect. While reforms, however contentious, are welcome, much more needs to be done to undo the damage that has been caused to the India growth story over the past few years. Reforms, especially those aimed at factor markets, land and labour, and more so governance and fixing accountability, need to be among the top priority.
So, assuming that the current government will complete its full term and that elections will be held in 2014, how will the immediate future unfold? Will household consumption, which forms the backbone of the Indian economy, remain stable or will households cut back in these times of uncertainty? Intuitively, slower growth coupled with an uncertain political climate implies lower levels of corporate investment, which will adversely impacts job creation and income growth. This implies that the extent of incremental increase in the purchasing power of households will be limited. Additionally, by reducing the opportunities available, lower growth will limit the ability of households to move up the distribution. The number of households who, for example, could have moved from the ranks of the aspirers to the ranks of the middle class will be adversely affected.
The other factor that will impact household demand is interest rates. The reluctance