Middle class exit is quietly on




It is very well known that only a small portion of India’s population pays income tax whereas everyone over eighteen is allowed to vote.

As per the annual report of the ministry of finance for 2014, the total number of assesses in 2013-2014 had stood at 4.7 crore. These includes individuals, families, trusts as well corporates. What this clearly tells us is that not many Indians pay income tax in an individual capacity. The number could be as low as 3% of the population.

One explanation for this is that India is a poor country, and in a poor country it is but logical that many people won’t pay income tax. Having said that 3% is too low a number. This is something that the latest Economic Survey which released on February 26, 2016.

As the Survey points out: “For the level of democracy, India’s ratio of taxpayers to voting age population is significantly less than that of comparable countries. This implies that while at present about 4 per cent of citizens who vote pay taxes, the percentage should be about 23.”

So around one-sixth of those who should be paying income tax are actually paying it. There are multiple implications of the same. The government doesn’t earn as much as it could. This means that the government has to borrow more to pay for its expenditure. And every extra rupee that the government borrows, means that there is one rupee less available for the private sector to borrow. This pushes up the costs of borrowing for the private sector, which in effect impacts their expansion plans.

It also means that a lot of black money is being generated. This black money finds its way into real estate and gold, where it is the easiest to hide. Black money going into real estate has driven up prices too extremely high levels all around the country, making it difficult for people who want to buy a home to live in, to be able to buy one.

But there is another problem—a small section of the population gets squeezed for income tax. The logic here is that the government takes from those who have money through taxation and hands it over to those who don’t, in various ways. A good example of this in the non-tax context was a policy that was followed in the state of West Bengal.

As economist Kaushik Basu writes in An Economist in the Real World: “To ensure that rural people get good education, West Bengal made it compulsory for teachers, including the best, to serve a term in rural areas.”

What did this do? As Basu points out: “It changed the catchment of “best” teachers, since many talented people preferred not to become teachers or, if they were already teachers, they preferred to move out to other places, where they would not be rotated.”

A similar sort of thing happens when a small section of population is squeezed for taxes. As the Economic Survey points out: “If the state’s role is predominantly redistribution, the middle class will seek – in Professor Albert Hirschman’s famous terminology – to exit from the state. They will avoid or minimise paying taxes; they will cocoon themselves in gated communities; they will use diesel generators to obtain power; they will go to private hospitals and send their children to private education institutions.”

This phenomenon is clearly visible in Bengaluru and other metropolitan cities all across the country. As the Economic Survey points out: “All these pathologies are evident in India. By reducing the pressure on the state, middle class exit will shrink it, eroding its legitimacy further, leading to more exit and so on. A state that prioritises or over-emphasises redistribution without providing basic public goods [roads, electricity, water and so on], risks unleashing this vicious spiral.”

Like was the case with the teachers of West Bengal, the Indian middle class exit is quietly on.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at vivek.kaul@gmail.com)

The column originally appeared in the Bangalore Mirror on March 9, 2016

About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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