Focus on the missing class in 2016

2015 has come to a close, having taught us quite a few lessons. Given the learning at hand, 2016 is full of phenomenal opportunities for India. The resilience of the Indian story will be at its full test by mid 2016, and this year could well become a turning point for India. 

For a developing country as large as India, which is now integrated into the global economic system and moves with the world on the economic front, it is the strong fundamentals of the economy (domestic sustainable consumption story) that will make India resilient to the global shocks. Here are some of the key considerations for us:

 

Let us look at the population-income dynamics.  Poverty Estimates according to various committees: From time to time, various committees have estimated the poor — from 216.5 million (Tendulkar committee) to 903 million (Arjun Sengupta committee). (Check illustration.)

 

From time to time, various studies and reports have estimated different numbers for the middle class, ranging from 23.6 million (The Credit Suisse’ Global Wealth Report 2015), 50 million (McKinsey, reference period 2005), to 264 million (World Bank, reference period 2005). The Credit Suisse’-Global Wealth Report 2015, reports that 23.6 million people who can be considered middle class with annual wealth of $13,662 (Rs 737,748 or Rs 61,480 per month), holds almost a quarter of the country’s wealth at $780 billion (Rs 5,070, 000 crore). 

A television channel,  in its survey of the middle class in 2007, utilised consumption-based household criteria (having car or scooter, colour television, or telephone, etc.) for the determination. It estimated that the middle class was approximately 20% of the population, or slightly over 200 million people. The current “India story” is much about this 200-300 million middle class population. 

 

The HNI population (High Net worth Individuals, people with investible assets of US$1 million or more) was around 1.53 lakh in 2011 (2011 Asia-Pacific Wealth Report by Merrill Lynch Global Wealth Management and Capgemini, reference period 2010), has been estimated to be 1.98 lakh in 2014, accounting for a combined wealth of over $785 billion (wealth report by Capgemini and Royal Bank of Canada (RBC). 

 

Though the variation and veracity of numbers can be debated till death, these numbers leave us with a big question: If the rich and middle class add up to less than 300 million, and between 216.5 to 416 million are estimated to be poor, and considering that only less than 3% of the population pays direct taxes, out of the total of 1,220 million population, how do we account for the rest 500-600 million population? Are these the lower middle income or poor population, or are these a “Missing Class”?

This leaves us with a big opportunity, which we can unleash: if we can transform the lives of these 500-600 million positively, no one can stop India from growing at double-digit rate for the next two-three decades. But this needs a new paradigm of development. 

 

India’s growth story largely depends on agriculture, its allied sectors and the services sector. Agriculture depends on the small and marginal farmers (farmers with a land holding of 1 hectare or 2.5 acres), and more than 80% of farmers come under this category, and it is these people (farmers) who feed us. Taking into account that our rural population is about 67.63% (825 million), the rural consumption story and the story of India depend upon this population. Also, these farmers depend on the rain gods, who have not been so kind for the past two years. Without creating “sustainable earnings” aimed at “sustainable consumption” for this segment of the population, the real story of India will remain untold and is the biggest question which calls for an answer. Rural development and the agriculture sector are intrinsically linked, and therefore policy interventions should be so devised that rural development and agriculture get their due share, and now global policies will also impact this sector. Commenting on the recent negotiations at the WTO Nairobi meet, leading agricultural scientist, Dr M.S. Swaminathan said, “WTO Nairobi meet could exacerbate global food insecurity, double standards over farming protection between developed and developing nations, an Indian Single Market in grains — and how India, already suffering ‘hidden’ famine, must have freedom to decide its own policies.” India cannot ignore the tiller of the soil who feeds a billion plus population while finding it difficult to make both the ends meet. 

On one side, the country needs to address the “missing class”, on the other hand, we also need to have advance planning for future contingencies. The year 2016 will gradually unfold surprises on multiple fronts, and we have to be well prepared to take on these imponderables. 

 

The global economy is not in a good shape and is not out of the 2008 crisis completely, and the stimulus continues in some form or the other. The United States has started tightening its rules for foreign workers, and our Indian IT story revolves around this. China has dollar strong reserves but the signs of strain are becoming apparent. This overall gives an indication that we must watch the US, China, Germany and Japan and try and ensure that we are resistant to sudden shocks, should they arise. We must be vigilant and well prepared regarding the multi-dimensional effects of the Syrian crisis.

Crude prices: If crude prices fall further, the fiscal deficit situation will be easy to handle, but then, there is a real threat of investment withdrawal by sovereign wealth funds of the oil rich nations, which will be needed to make up for the losses due to low oil prices in their home country, and if oil prices rise steeply, we have the crisis of fiscal deficit to attend to. 

US Fed rates: In the likelihood of Fed raising the interest rates again, the money may flow out of the country, thereby straining our investments and foreign reserves 

Climate change and natural calamities: Given the regularity with which the natural calamities are striking due to climate change, we now need to add the “fifth season” of natural calamities and factor in the losses and investments required thereafter on a more regular basis. Also, now major towns depend on reservoirs for water needs around the year, and already, major metros are heading towards a water crisis. There are signs of India becoming a water stressed nation. Rainwater harvesting and water recycling need to be adopted on a large scale to prevent India from becoming a water scarce country.

International conflicts and growing global intolerance are an extremely disturbing trend, and we have to transform this “conflict of civilisations” into a “dialogue among civilisations”. 

The power sector can run into sustainability issues in 2016 and we must be prepared for this. The power sector, and not just DISCOMS, needs structural reforms in a holistic manner. Given our recent commitments during the climate change summit, we must diversify our power basket. 

Job creation and youth unrest: Despite our best efforts, we are still not prepared to absorb the 12 million new job entrants every year, and there is a likelihood of youth unrest as a result of that. This has to be addressed seriously. “Skill Indi
a”, “Stand up India” and “Start up India” are the steps which deserve a focused attention, since this affects the future of the “missing class”. 

Budget cuts in social sectors like health and education will have a long-term effect on the growth prospects of the country. If one looks at the wonderful turnaround story of China and Singapore, and their transition from being third world countries to first world countries, education and health played a key role in their turnarounds. Singapore’s health system is regarded as one of the best in the world. India needs to invest in agriculture, health and education to reap the deferred dividends of such critical investments.

NPAs (non performing assets) have worsened in the past one year, and this is not a good sign. The recent default by a leading auto components’ major is an early warning sign and should be taken seriously. We are living in an economy that is aspiring to grow by the double digits but its large corporates are living on “stretched valuations” and “strained balance sheets”. The financial sector faces a daunting challenge and a formidable risk and is in need of structural reform.

Migration: With time, people are migrating from the countryside to urban areas, and this is skewing our urban and rural balance. On the one side, it strains the already overburdened urban infrastructure and on the other, it deprives the labour needs of MSME and agriculture. This will have its own share of socio-economic challenges, and the answer lies in better education, health and job opportunities in rural areas and addressing the profitability and productivity of agriculture. Also, the entrepreneurs have started moving out of the country and are setting their offices in Singapore, US and other offshores, and this needs to be addressed on priority. 

National security: So far, the country was secure from the northern borders and the challenge came from the north-western part, but now, the security horizons are narrowing, and this is showing signs of an impending challenge. We need to be prepared, as with the present speed, our weapon acquisition will take a few years. Cybersecurity is a new dimension to be attended to seriously. The country has tremendous potential and we need to move swiftly. The current logjam in Parliament does not bode well for any democratic polity. It is time a consensus is arrived at for a national agenda, forgetting electoral defeats and differences. We cannot afford to lose time in or out of Parliament. All elected representatives must not forget that “power flows through you and not from you”. The public has voted to deliver and not for empty rhetoric. The electorate in India is mature enough and no one can take it for granted. 

It is time everyone joined hands and helped achieve the goals that we have set for our country. It is not just about doing right things, but also doing things rightly that will take India forward.  Looking forward to an exciting year, full of opportunities for all my countrymen. Let’s unite to take India forward.