Middle Class Values and Political Economy: The New Middle Class

Introduction

The reforms of the 1990s, accelerated the growth of income and poverty reduction, demonstrating the virtues of a competitive market economy powered by Indian Entrepreneurship.  Consequently India has moved over the last decade from low income to lower middle income.  The stirrings observed in Delhi during the past two years are a precursor of the emerging middle class and political demands for better governance are likely to follow. The middle class has historically grown in every country along with income and has demanded and got better governance in every (now) developed country. This process has been accelerated in India by the early establishment of democracy and a flourishing media.

Stirrings

 The anti-corruption agitation of 2011 and the public outpouring of support for it was perhaps the first indication of the emergence of this "new middle class.".  The common Delhi resident’s passionate outrage was less about the specific scam allegations relating to CWG and Telecom and more about the basic mistreatment of citizens by the government service providers (water, power, police, MCD).  The new middle class, which has had a taste of freedom and equality in the market place, was fed up with the arrogance of local government functionaries and the humiliating treatment meted out by corrupt and self-serving officials, while their bureaucratic and political bosses hypocritically claimed to be ‘servants of the people.’  The protests were an expression of outrage against the inequality between the government as service provider on one side and the general public on the other side of the counter.  Though both events would have been damp squibs without media attention, underlying these is a cry for attention to citizen’s personal security and equal treatment to all female and male, political rulers and the ruled.

Twenty three year old "Nirbhay" and her parents reportedly migrated to Delhi from a village in Ballia district in Eastern UP, a region that is often equated with Bihar.  She was training to be a physiotherapist, acquiring a skill that would earn her a decent income.  She represented the dream, of numerous families, including those who protested on the streets: women of all ages, income classes, castes and professional-work categories, who saw something of themselves in her.  She was the child of the new era of economic opportunity.

The Middle Class

Definition

                From the many definitions of middle class I would emphasize the two most common shared elements: A level of income that is above the level needed for survival  (including savings for emergencies) and a level of education and skills necessary to earn the posited level of income.  The education has to be at a quality-level to make the individual aware of the world beyond his/hers immediate day to day environment.  This awareness is essential for making an empathetic connection between one’s own selfish concerns and the concerns of other similarly placed individuals.  Thus the third element is usually a set of shared values that to varying degrees are common to the ‘middle class.’   

However, 'educated' does not necessarily mean intellectual: To be a part of the (lower) middle class you have to have sufficient education to be aware of issues and elements that are outside the ambit of the skills needed for your job and to navigate the space that you inhabit, but not necessarily educated to a level that makes one capable of participating in debates about these issue or deriving solutions to social or economic problems.  That is a criterion for classification into the middle class intelligentsia.

Values

Is there a key “middle class value?’ In my view there are two values that support each other.   One, that as a human being one has a fundamental right to, “life liberty and the pursuit of happiness.”  Second is an understanding and appreciation of true equality, that it is universal and indivisible. That is, if I have this right, then all individuals must have this right and that the only way I can truly have and preserve this right is for all others to have the same right.  Practically this translates into a demand for equality of opportunity and equality of treatment.  The competitive market economy embodies these ideals to a much greater degree than the hierarchical and segmented Indian society or the self-centered politico-bureaucratic system that now constitutes the ruling class.  The fast growth unleashed by the 1991 reforms has created demand for education and skills with which to earn income.  It has also shown the current and potential members of the middle class that a market economy cares primarily about skills and competence when it is seeking to get a job done and about the money you want to spend on its products as a consumer, and much less if at all about your caste, class or family background.  Therefore this demand for equal treatment is focused on the services that government provides, both the public goods and services such as personal security, that only Government can provide, as well as private goods and services that it has deliberately chosen to monopolize or control such as higher education and electricity.

Political Economy of Welfare

Simple welfare theory teaches that there are three elements of Social Welfare.  (1) Private income and consumption, (2) Public Goods and Services (legal, police, roads, public transport, public health-sewage, sanitation)  (3) The distribution of income, poverty, inclusion.   Taxes and transfers can be used to change, within limits, the distribution of income and thus improve social welfare. To the extent there is a gap between the claims and reality (wastage, corruption) these are rightly called populist measures.  Much of Indian political discourse since the sixties has focused on this third element.  India under Mrs. Indira Gandhi was the first country in the world to raise “poverty alleviation” to a national objective under the rubric of “Garibi Hatao.” 

The economic reforms of the 1990s raised public awareness of the role of faster growth in raising the incomes and Welfare of the people (item (1)), but the balance shifted back to (3) from 2004.  The dramatic fall in the national growth rate and the threat of junk status coupled with the recent prominence of the ‘Gujarat model’  have restored some of the importance of income growth.  The maintenance of a sufficiently high average per capita growth - between 6%  and 7% ( about  8% GDP), which generates income opportunity for the emerging middle class will soon become de rigor.  The rise of the middle class also promises to bring Public goods and services (item 2) along with governance into the public discourse within this decade. This will for the first time establish a balance between the three elements of Social Welfare that should be part of the political debate.

Conclusion

Though this new middle class is still relatively small and concentrated in the Urban and semi-urban areas, it is projected to grow rapidly in the next two decades if our average per capita GDP grows at its full potential of  7% (~ 8.25% GDP).  The political party that finds the right policy balance between these three objectives, and convinces both the emerging middle class and the lower income groups, will be the winners. 
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A shorter version of this post appeared as an article in the Indian Express Op ed on Monday 28th January 2013, under the banner, "What the Middle Class Wants,"  http://www.indianexpress.com/news/what-the-middle-class-wants/1065442/ 

Defence FDI or Imports?

    For 60 years we have been striving to become self sufficient in Defense production with minor success.  Unlike in consumer products where "self sufficiency" is an illusion if not a delusion, "self sufficiency" has real substance in the case of defense production.  One of our cherished and oft proclaimed foreign policy goals is, "strategic autonomy in decision making".  The more we are dependent on imported equipment and ammunition the less strategic autonomy we have in general and particularly in a hot war.

   Given the nature and structure of our economy the simplest and most effective way to achieve self sufficiency in defense is to allow our private sector to produce and sell any and every defense item and to allow up to 100% Foreign direct investment (FDI).  But won't that make us 100% dependent on foreigners?  Well ask yourself the following question. Do you prefer the current situation in which many systems, sub-systems and parts are imported 100% or a new system that is produced in India with 100% FDI.  In the case of import of defense equipment we are completely dependent on others at a time of potential or actual conflict to replace any losses.  In FDI case we have the option to a much greater extent to ramp up production.  Further the transfer of technology is much deeper and more meaningful with FDI as there will be numerous Indians working at different levels of the company who will get hands on experience of the technology, production techniques, sources of supply of components etc.. Over time the technology defuses from the company to other domesic company through mobility of employees and access to better components and parts that the FDI company uses.  This means a deeper and more thorough transfer of technology than any purchase of blueprints can accomplish, particularly if the technology is highly sophisticated.  The technology of defense systems is highly interconnected web of technologies, sub-systems and components that is completely missed by an importer even a sophisticated one such as the defence department.

   To get the maximum benifits from a new policy of up to 100% FDI, I would reccomend the following structure of FDI to be implemented by an FIPB type Defense technology board:

(a) Up to 100% FDI in 1st generation high tech defense technologies (such as those being currently incorporated in the US on its ‘under-development’ defense aircraft & space craft, warships, armored fighting vehicles, missiles and smart bombs).
(b) Up to 74% FDI 2nd generation defense technologies (such as those already incorporated in the advanced Western countries’ frontline, ‘in-service’ fighters, bombers, warships, tanks, arms and ammunition).
(c) Up to 51% FDI in 3rd generation and dual use technologies for (defense) items requiring an industrial license for production by the private sector. This allows the Indian company to be a subsidiary of the home country company and will facilitate transfer of technology that the home country doesn’t allow to be sold to other countries’ companies.

(d) Up to 49% FDI on automatic route.  As Government is the sole buyer of defense equipment and also controls exports of defense equipment, most of these are likely to be in the form of JVs with an Indian private or public sector partner having 51% equity.
     The board would determine the sophistication of the technology and specify the level of FDI accordingly.  Both the domestic private sector and the domestic public sector would be open to participate in joint ventures, depending primarily on the preference of the FDI partner supplying the sophisticated technology.

     One would expect rational FDI investors to prefer private Indian companies for investment in parts components and smaller sub-systems but to hedge their bets vis-a-vis complete system and large sub-system by involving the public sector, as this is more likely to bring in demand from the government.  Public sector units would still be free to produce any item themselves if the can develop or acquire the technology.  The defense technology board can always take suitable account of this when actual cases start coming before it

    The time for introduction of such a policy is particularly apt., given that the USA is now willing to supply the most sophisticated technologies to India, and US companies would be eager to exploit this opportunity given the poor state of Developed country finances and demand for defense products.  The companies form other countries are in a similar position and would be equally eager to compete with the US in participating in this long term opportunity. 

Dynasty: Too Little or Too Much

    Rahul Gandhi's unanimous election as Vice President of the Congress Party has set off a flurry of discussion on the issue of Dynasty and dynastic succession in political parties. Whether it is Karunanidhi in Tamil Nadu, Mulayam Singh in UP, Jaganmohan Reddy in Andhra or Chauthala in Haryana, there is no dearth of political "dynasties" in India. Indeed political dynasties are common across South Asia, whether in Bangladesh (the two begums), Sri Lanka (Bandarnayaka) to Pakistan (Bhuttos).  Is there something in our culture that brings this about? 

       Historically the hold of the Varna system solidified in the form of occupational categories that are passed on from father to son, was quite pronounced and visible in daily life.  These appeared to be quite stable as long as the economic system was quite static and stable. with the arrival of modern education and industry new professions arose, that did not exist previously. These were open to those who were in a position to exploit the opportunity, partly because of their privileged position but partly because they were the first to see a new lucrative opportunity. 

But new opportunities and new professions do not affect old traditional occupations that continue to have their old linkages such as various forms of trade and business. Though business has evolved tremendously since independence, sons and increasingly daughters tend to enter their fathers business whatever it may. Similarly, though politics has evolved tremendously since independence, with the entry of new caste groups into the political space, the natural tendency seems to be for progeny to enter the family occupation whether it is industry, services or politics.  Thus politics is much more like a family business than a family profession or occupation whether it is a modern one like education or a traditional one like carpenter or mason.  

  Thus to find out whether the is " too much dynasty" in politics, we need to compare the proportion of second or third generation MPs and MLAs in Parliament and legislatures with the proportion of second- third generation members holding executive positions (MDs, Presidents etc) in Public Ltd companies.  The public impression is that the degree of dynastic succession is greater in politics than in business.  We need a proper study to find out  whenter this is really true (and statistically significantly). [bit.ly/10sejuk]

Dual Pricing or Two Speed de-Control

The Indian Government has recently carried out a partial decontrol of Diesel pricing.  This involves raising the price paid by so called "bulk consumers" by Rs. 9 per liter to raise it to market price and thus eliminate the subsidy to these buyers.  It has also allowed prices charged to other diesel consumers to be raised by about 50paise (1/2 Rs) per month.   Several News paper editorials and comments have criticized the introduction of a "dual price system' that will lead to leakages and corruption.  This criticism would indeed be valid if the difference between the two sets of prices remains large and permanent.  This can however only happen if the government develops cold feet about the partial decontrol and again stops oil companies from raising the diesel price by 50 paise per month. If the system continues to function as announced, the gap between the two sets of prices will close by Rs 1 every two months and be eliminated in about 18 months.
     Thus the system is more like a two speed decontrol than a dual price system, and to the extent that government implements it without back tracking, it will indeed bring prices fully up to market prices. After two years consumers and the media will barely notice when prices are adjusted up of down by 50 paise, in an economy in which prices of individual vegetables and fruits can fluctuate up to 50% between good and bad harvests.  This system will provide an incentive to all users to economize on the use of this largely imported fuel, and for entrepreneurs to develop and propogate fuel saving devices and systems.
      In fact the government should consider introducing a similar system for two types of Kerosene users. One set that has access to (subsidized) electricity or LPG and those that do not. The prices of the former should be allowed to rise by Rs. 1 per month and the latter by 50 paise per month.  In addition all those falling in the latter group should be provided with free solar lantern and solar cooker it they agree to switch to the former group, as this would be the equivalent of having electricity for lighting and LPG for cooking.

With phased decontrol of the prices of all petroleum products we could see a technological revolution in oil use and a "sea change" in the Current account within three years.

Sustain India Growth At potential for Two decades

Introduction
The Economic Times of December 28, 2012, headlined that, "India can and should plan for double digit growth," stating that, " Only incoherent, populist politics and poor governance deriving from it hold down the growth rate."  The financial express of January 7, 2013 reported the PM as saying that "The only way forward for this country is to register a growth rate of 9-10%.” Every time the Indian Economy starts to recover, the talk of double digit growth is not far behind.  This detracts from and misleads politicians and government from the real challenge: Restoring the Indian economy to its growth potential of about 8.25% GDP growth and maintaining it there for at leas two decades till India becomes an upper middle income economy.

 The 12^th Plan, recently approved by the NDC, targets a growth rate of 8% for the twelfth plan period 2012-13 to 2016-17.  This was a reduction from the 8.2% average proposed earlier in the year and a sharp downward revision from the 9.5% proposed in the Approach paper to the 12^th plan.  With a likely growth rate of 5.5% in 2012-13 and an optimistic 6.5% in 2013-14 this would require and average growth of over 9% in the last three years of the plan.  Despite this, experts have criticized the Planning Commission for not targeting double-digit growth.  In an article, Claude Smadja a prominent observer of global growth concluded that , “..with some effective reformist actions.. India will bring the ‘Hindu growth rate’ to what should be 9 or 10 per cent a year.”

To my mind the most disturbing point in all this is not that the Planning Commission’s forecast of a year ago turned out to be so wrong - It is in the elite company of the Finance Ministry, EAC, World Bank, IMF and numerous international and domestic private forecasters.  The more important point is that too many influential people in India and abroad seem to believe that attaining an average growth rate of 9-10% over ten years is as easy as ticking of policy suggestions on a power point presentation.  The history of economic growth conclusively demonstrates the falsity of this assumption.  Having had the good fortune to study growth, one was in a position to oppose the adoption of unreasonably high growth targets (above 8.5%) in both the 10^th and 11^th plans and to delicately warn in 2008-9 (Economic Survey) that the key issue for India was not how to raise economic growth from the existing 8-8.5% to 9-10% (on which analysts, businessmen, government and media seemed to be virtually unanimous), but how to sustain 8 to 8.5% over the next two decades to become an upper middle income country.[i]

There have been scores of countries that have grown at very fast rates of GDP growth of over 8.5%% (GDP) for a few years but only a limited number that have sustained this average for a decade.  I call these “shooting stars” and ‘sprinters’ respectively. For the entire set of countries the correlation between average decadal growth rate in the 1990s and the 2000s is negative, having come down from a mildly positive 0.13 in earlier decades.  This means that in general growing fast in one decade does not guarantee a country equal success in the next decade.  Worst in the last two decades it has paradoxically proved to be a handicap. 

The transformation of an economy from low income to upper middle income takes many decades. Sustained fast growth is neither constitutional nor a human right or entitlement, that can be taken for granted once it has been bestowed or attained.  Just because India has grown at a per capita GDP growth of 6.1 per cent in the decade 2001 to 2011 and is one of eight countries to grow at 6% or higher during this period does not guarantee that it will continue to grow at this rate.  Like other fast growing economies, India has to constantly work at meeting the new challenges that arise from both outside and inside the country, in the form of disruptions and shocks, such as the global financial crisis and the oil price shocks.  Existing polices and institutions have to be constantly reevaluated as the trade-offs constantly change with faster growth and the faster the growth the greater the change.  Thus a nationalized coal industry that may have been able to cope with the growth rate of demand in the eighties is totally inadequate to the challenges of the fast growth of the 2000s: de-nationalization is now a greater imperative.   Some of these challenges are paradoxically the negative effect of faster growth.  To take a trivial example, in many parts of India, fast growth in real estate has depleted the standard, known sources of sand for construction.  Another more critical example is the depletion of underground aquifers and the pollution of surface and underground water sources.  Unless the policy and regulatory structures adapt and evolve to ensure that either new sources of these natural resource are found or there is enough incentive for innovation in developing substitutes, further growth will be hampered.  

 Institutional adaptation and reform also becomes essential as a country moves from the low income category to lower middle income category as we have in the last few years.  As institutions (administration, police, courts, legal system, social rules and norms) are slow to adapt and change, the faster the growth the greater the gap between the type of institutions that are needed and those that exist.  If un-addressed these can give rise to social discontent and conflict that can paralyze decision making and bring growth to a grinding halt.   Thus our institutions dealing with rural land, its conversion into urban land, the classification of land use and the development of urban public goods, are now quite inadequate to the needs of growth and in urgent need of reform.

                There have been less than a score of countries in history, which have grown for over a decade at an average per capita GDP growth rate of 7.1 per cent or more. The significance of this cut off (7.1%)  is that per capita income doubles in a decade and would become eightfold in three decades. There have also been about a dozen countries in history that have sustained a per capita growth of 6 to 7% for a decade.  India was in 2011 a member of this second category, but is in danger of falling out of it this year.  Talk of double-digit GDP growth (8,5% per capita) distracts from the challenge of maintaining per capita growth at 6% plus and the even more challenging one of bringing it back to the potential rate of  7% (about 8.25% GDP) and sustaining it at that level for the next two decades.

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[i] For analysis and papers see  website   https://sites.google.com/site/drarvindvirmani/

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A version of this article appeared under the banner, " The Double Digit Fallacy," on the Op-ed page of  the Indian Express of Monday 8th January, 2013, at  http://www.indianexpress.com/news/the-double-digit-fallacy/1055392/.

A Parable of Two People: Transiting To A New Era

One of the daily newspapers had a story of Nirbhay’s village in Ballia and how her grandmother and other relatives had gathered to pray for her.  On hearing “Ballia” my memory spiked back to what now appears to be another era and the name of another famous person from Ballia in Eastern UP, the part of UP that is still relatively poor and backward compared to Central and western UP.  In the late  1960s and 1970s, Ballia was represented in Parliament by Shri Chander Shekhar.  Starting his political life in the Praja Socialist Party, he was later known as a “young Turk” in the Congress and was a member of the “Socialist forum” within the party.  He later left the Congress Party and went on to become Prime Minister of the Samajwadi Janta Party government in 1990-91. He was, as affirmed to me by two eminent professors, a large hearted and generous man. With only a little exaggeration, one could call him a “Socialist Prince” who operated on the principle that a good leader must be generous to his subjects.   As Prime Minister he led India into the fiscal-BOP crises of 1990-91.

Jump two decades to 2011 and 2012 and to twenty three year old Nirbhaya a child of the new era. She and her parents came to New Delhi from Ballia, which has probably changed little in these two decades, compared to Central and Western UP.  These parents from one of the most ‘backward’ regions of India had educated their daughter to the extent possible.  She was training to be a physiotherapist, acquiring a skill that would earn her a decent income and dreamt of a fulfilling urban middle class life.  She represented the dream, not only of herself and her family, but a number of women and men who came out on the streets to protest her brutal rape and attempted murder on a bus.  According to press reports, they included female house workers, lower middle class working women, young people from all walks of life and women of all ages, who saw something of themselves in her.

These two people from relatively poor and backward Ballia, one a dominant male member of the post-independence political elite and the other a young educated girl from a modest background are metaphors for an era of hierarchical patronage and government largesse (Mai Bap Sarkar) that has ended and the beginning of an era of democratic equality and fulfillment of the right to “Life, liberty and the Pursuit of happiness.”