The Indian economy has been a better performing one since the pandemic, with optimistic projections for the future as well. At the same time, we have also been hearing constant articulation by FMCG companies on consumption not quite picking up in the past few years. Consumption accounts for 60% of GDP. It is here that we may have to pause and reflect. In the book Breakpoint by Saurabh Mukherjea, written with Nandita Rajhansa and Sapna Bhavsar, this analysis is hard-hitting. The authors say the middle class will finally be the driver of the economy, and this is at a breakpoint. Mukherjea is spot on when he says the rich and poor are well taken care of by the government. The poor get all the subsidies and so-called freebies. The rich benefit from all the heavy expenditure incurred through capex outlays. But what about the middle class?
While 2025-26 did provide the right push in the form of tax cuts on both the direct and indirect taxes front, there can be a deeper-rooted problem. This is what the book explores, backed by very convining data. This class accounts for most of the direct and indirect taxes that are paid to the government.
First, who is the middle class? The authors use a very practical number taken from the tax statistics which excludes agriculture. They pick up the bracket of Rs 5 lakh-Rs 1 crore as the income cutoff, which is a fair enough approach. This gives a total of 40 million tax returns, which could roughly translate to 150-160 million people, which actually are required to do a lot of the spending to keep consumption ticking. His storyline is quite straight forward. First is the issue of employment. Here, rather than looking at overall unemployment rate, the authors use data to show that it is as high as 29% at the graduate level. This is significant because we are talking of qualified persons not finding jobs. The fault is not with the market but with the qualification or skill set. He highlights how the system of entrance exams could be flawed as students with engineering degrees do not have the capability of thinking or applying their minds as engineers. This is a reflection of the education system, which has to be tackled separately.
Second, the authors point out to stagnancy in incomes or wages over the years for this bracket of people. This story line fits in well with what one hears of in the corporate world where the increments given are limited, but the top layers get high remuneration in the form of bonuses and stock options. Intuitively one can see that if salaries do not increase, the spending power also gets curbed. Related to the above is the issue of real income which has been affected by inflation, which further puts pressure on households. There is a lot of data in the book to show this by comparing average salary per employee at two points of time based on wage bill and headcount.
In this kind of set-up he brings in the third factor of AI. Giving real examples based on the field work done by the authors, they show how AI has made human beings less important. It would be giving too much away by providing the examples here. There are several cases where not only is efficiency enhanced but costs saved by relying more on AI for better delivery of results.
While one can argue that AI may not be the best bet for a labour-surplus economy it is an inevitability that cannot be escaped. In fact, even if keep AI aside, there has been considerable labour displacing tools used by companies in the form of automation which has worked well. Therefore, a combination of the two has affected the hiring patterns over the years.
Now, Mukherjea adds a new dimension which is his domain — the stock market. This same class of people have put in a lot of money in the stock market in the F&O segment, ostensibly to earn better returns. But this can have nasty results as the quest to earn quick money leads to considerable losses. Mukherjea links this development with social media, where there is this new class of finfluencers who have shown the moon to followers thus leading to this explosion in F&O activity. In this context, he commends the government on what has been done on gaming, which has become another malaise, with people throwing in their hats, hoping to make quick money.
A phenomenon in parallel that has evolved at a prodigious pace is leverage at the household level. What was once used to purchase a house or an automobile has spread to consumption loans, which he believes may not be the best thing under conditions where incomes are not rising. Taking loans for holidays or experiences, or worse still, investing in the markets has increased the indebtedness of households that can have serious ramifications of default at some stage.
AI cannot replicate skills such as creativity, empathy and dexterity, which have a distinct human bias. There is need for reorientation of skill sets which will be in demand as AI takes over at a faster pace in the country. There is scope for creation of more entrepreneurial jobs which will be the new horizon that students will be aiming for. Quite clearly the nation is at a break point where there is need for the working class as well as the government from the point of view of policy to be more focused. This consumption impasse has to be passed and meaningful job creation is the way out, while taking into account the AI factor.
Breakpoint is another brilliant book from Mukherjea which is optimistic, but also serves as a wake-up call at several levels.
Madan Sabnavis is chief economist, Bank of Baroda
Breakpoint: The Crisis of the Middle Class and the Future of Work
Saurabh Mukherjea
with Nandita Rajhansa & Sapana Bhavsar
Juggernaut
Pp 280, Rs 799