By S Srinivasan
We have an ominous prediction from Rathin Roy, member of the Prime Minister’s Economic Advisory Council and Director of National Institute of Public Finance and Policy, that the country could be heading towards the “middle income” trap. According to his prognosis, the middle-class that has fuelled the economy through growth in consumption may not sustain this performance, leading to possible stagnation. A plunge in income growth, decreasing money supply and rising uncertainty have been identified as the three triggers for this possibility. This warning is invaluable, but does not enlighten us on a solution. Hence, let us start by examining the triggers.
The major primary sources of income are agriculture and allied areas, exports of goods and services and inward remittances, with the other sectors such as manufacturing being derived demand. Other than in FY15, agriculture growth rate has been positive for several years. More recently, agriculture growth rate is up 3.8% in FY19 compared to 3.4% the previous year. Export of merchandise is at a record level of $331 billion in FY19 compared to $303 billion the previous year. Inward remittances, at $80 billion in FY18, are up, against an average of $66 billion in the previous five years. Software exports, at $137 billion in FY19, are up 7-9%, compared to the previous year. Thus, available data shows no precipitous fall in income.
Currently, the NBFC, and, to a lesser extent, the banking sector are saddled with serious problems, resulting in less headroom for credit expansion. An important component is mismatch of fund inflows and outflows particularly relating to the infra sector which is somewhat more benign compared to pure NPAs. If the government releases liquidity without fiscal indiscipline, normalcy will be restored within the medium term.
Significantly, no transparent, well-run business lists lack of credit as a serious issue and, hence, there appears hope in the horizon. Rising uncertainly is not the cause, but a consequence, of a deeper malaise. Anxiety due to internal factors such as demonetisation and GST are behind us. A stable government with majority is here. Other than US president Donald Trump’s tantrum on tariffs, there is no significant threat in the global scene. Of course, there is always a threat to the longevity of any business or profession such as advent of e-vehicles or changes in visa rules for the tech sector. But, this may be a zero sum game with one entity going under and another emerging.
Thus, it appears that the three triggers are manageable. But there are alternate possibilities for reduction in consumption. Spurred by liberalisation, the 200 million strong middle-class had gone on a purchasing binge, acquiring everything from a Porsche to the Pomeranian. With creature comforts met, the next level in Maslow’s hierarchy is being attained through purchase of luxury items such as internationally branded perfumes and purses, which has vaulted from $6.5 billion in 2012 to around $30 billion last year. The number of Indians travelling abroad has sky rocketed from 8.3 million in 2006 to 25 million now, and is further expected to touch 50 million in the next few years. What is the relevance of all this to the bigger issue? Most of the opulence is an urban phenomenon; 50 kilometres beyond city limits, the state of schools, hospitals and sanitation in towns or villages remains pathetic. Instead of a cascaded flow of money across the country from the metros to the villages, we have engendered economic constipation and diversion of wealth abroad leading to great internal inequality. The Paris School of Economics has released the World Inequality Report adopted by the World Economic Forum showing India in the top five countries with the most skewed income and wealth distribution and this is deteriorating further. We must devise a mechanism to create the next 200 million middle income earners through a win-win strategy.
The cream clamouring for world-class cities pays ten of dollars an hour in parking charges abroad against barely cents at home. A choice of seat in flight costs Rs 10,000, the same as property tax for a year. Why not steeply increase property and local taxes/charges in metros to fund city improvement through PPP and to assist rural development? The cost increase will also induce movement of activity and personnel out of metros. In a mother of all transformations, rejuvenate and decongest cities to create the next lot of middle income earners in the outlying areas and avoid economic stagnation.