The way the government squeezes the middle class dry is slowly being realized by the people. People are opening their eyes to it. Last month, after the GST Council meeting, when the Finance Minister announced that popcorn would be taxed in multiple ways—non-branded popcorn at 5% GST, branded popcorn at 12%, and caramel popcorn at 18%—it led to an uproar on social media. Netizens mocked Nirmala Sitharaman, calling her 'Vasooli Taai'.
The internet was flooded with memes, with someone even joking that she might start taxing the memes made on her. While this awareness is good, most people do not understand how deep and severe this problem is. It's not just about the GST rates on a few items; in reality, our country's middle class is gradually being wiped out. This issue is much bigger than Nirmala Sitharaman.
In the second quarter of 2024, India's largest FMCG company, Hindustan Unilever, saw a 3.86% decline in profit compared to the previous year. FMCG stands for Fast-Moving Consumer Goods, which include packaged foods, cosmetics, skincare, cleaning products, health supplements, and diapers—products essential for daily life. A decline in sales signals a major problem.
The shrinking middle class is a significant reason for this downturn. According to Hindustan Unilever's CEO, Rohit Jawa, urban growth is falling. Nestle India's chairman, Suresh Narayanan, has pointed out that demand is weakest in megacities and metros. Tata Consumer Products and ITC have also reported reduced urban demand and economic activity.
Urban areas represent the middle-class people living in cities, who now struggle to afford discretionary spending due to excessive taxation. The government has taxed them so much that they might not even qualify as middle class anymore.
Who Is the Middle Class?
A popular framework developed by businessman Kishore Biyani divides India into three segments:
- India-1 (Upper Class) - About 120 million people with a per capita income of approximately ₹1.23 million per year. This segment drives 50-60% of India's consumption.
- India-2 (Middle Class or Aspirant Class) - Around 300 million people with a per capita income of ₹250,000 per year. For a family of four, this translates to an annual income of ₹1 million.
- India-3 (Lower Class and Poor) - The largest segment, comprising those with no savings and struggling to meet daily needs.
Most Indian companies focus on selling to the upper and middle classes. However, recent financial reports indicate that while the upper class is moving towards premium goods, the middle class is burdened by taxes and inflation, forcing them to cut down on even entry-level products.
At first glance, India's GDP appears to be rising, and government revenue is increasing, but the middle class is left empty-handed. The lower class fares even worse, often relying on free ration schemes.
Why Is This Happening?
Are the middle and lower classes lazy? Do they lack work ethic? According to Indian CEOs, the blame lies with the people themselves. Many corporate leaders have suggested that Indians should work 70-90 hours a week to improve their financial conditions. However, the truth is the opposite.
While corporate profits have soared, salary growth has remained stagnant. Between 2019 and 2023, profits of Indian corporations across six major sectors increased fourfold. Yet, salary growth remained negative, meaning inflation outpaced wage hikes. In the past five years, inflation increased at an average annual rate of 5.7%, but salaries did not keep up.
Even the government's Chief Economic Advisor, V. Anantha Nageswaran, has acknowledged that corporate profits have surged, while employee wages have not seen proportional growth. Meanwhile, companies continue to exploit tax breaks provided by the Modi government.
Corporate Tax Cuts vs. Public Welfare
In 2019, the Modi government slashed corporate tax rates, resulting in a revenue loss of ₹1.45 lakh crore in 2019-20 alone. Over the past five years, the government's revenue loss due to corporate tax cuts amounts to ₹9 trillion. This money could have been used for healthcare, education, infrastructure, and public services.
To compensate for these losses, the government has placed an increasing tax burden on individuals. Income tax revenue has now surpassed corporate tax revenue. In 2018-19, corporate tax contributed 58.3% of direct taxes; by 2023-24, this share fell to 46.5%. Meanwhile, income tax paid by individuals rose significantly.
Despite fewer than 3% of Indians paying income tax, this small segment collectively contributes more in taxes than all companies in India. Under Dr. Manmohan Singh's government, corporate tax constituted 35% of total tax revenue. Under Modi, this share has dropped to 26%.
The Burden of GST on the Middle Class
A report by Oxfam highlights that:
- The bottom 50% of India's population contributes over 60% of total GST revenue.
- The middle 40% contributes around one-third.
- The richest 10% pay just 3-4% of total GST.
This regressive taxation ensures that the middle and lower classes bear the brunt of the tax burden, while the wealthy benefit from loopholes and exemptions.
Rising Costs of Living
The cost of essential goods and services has skyrocketed due to taxation:
- Housing: In the top seven Indian cities, home prices have jumped 23% in one year.
- Car Purchases: The total tax burden on car buyers, including GST and cess, often exceeds 50%.
- Daily Essentials: Pre-packaged food items like flour, butter, curd, and lentils attract 5% GST. Medicines are taxed at 12%.
- Electronics & Appliances: Refrigerators, air purifiers, and water purifiers all carry an 18% GST.
- Fuel & Transport: Petrol and diesel are taxed at rates exceeding 50%, making fuel prices in India higher than in the U.S.
Shrinking Middle Class and Threat to Democracy
Harvard economist Robert J. Barro's research suggests that democracies thrive when the middle class holds a significant share of national income. When the middle class shrinks, democracy itself is at risk. India faces this danger today.
Despite historically strong urban middle-class support for Narendra Modi and BJP, the 2024 Lok Sabha elections saw a 3% decline in BJP's middle-class vote share. BJP failed to secure a majority, winning only 240 seats.
However, six months after the elections, the middle class continues to face the same economic squeeze. Inflation rises while salaries stagnate. Corporate profits reach record highs, while the common person struggles to survive.
The Path Forward
The middle class must recognize that their financial struggles are not due to a lack of effort but result from systemic economic policies that favor the wealthy. The government's reliance on corporate funding influences policymaking, ensuring that big businesses continue to benefit at the expense of ordinary citizens.
To reclaim economic power, the middle class must:
- Hold politicians accountable: Demand policies that support fair wages and progressive taxation.
- Vote wisely: Avoid supporting leaders who prioritize corporate interests over public welfare.
- Stay informed: Recognize distractions like religious and caste-based politics used to divert attention from economic issues.
Economic justice requires unity among the working and middle classes against the corporate-government nexus. Only then can the middle class regain financial stability and secure a democratic future for the country.