Is the middle class in India being ignored? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is the middle class in India being ignored? 

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In this issue:
» India's trade balance remains poor
» Is a new BRICS bank required?
» Wealthy Americans save more
» Unemployment in China is rising
» ...and more!


00:00
 
One of the success stories of India's stupendous GDP growth in the three years before the global financial crisis is that it spawned the rise of the middle class. As growth blossomed so did personal disposable incomes, which in turn increased the propensity to spend. This had the impact of further bolstering India's overall growth.

So considering the importance of this section of the society, has the government done much for it? An article in Business Standard points out that this has not been the case. Typically the focus of the government has always been on the top (i.e. the rich) and the bottom (i.e. the poor) of the income pyramid. The rich people or industrialists are many a time given enough incentives to induce them to make investments. This is because the businesses/companies that they either run or own have the potential to add to growth and create jobs. The poor have always been in the limelight because they need to be assisted constantly. And they carry large vote banks. Thus, any improvement in their incomes or standard of living would mean that there is that much more demand and thereby further improvement for growth. So you have programmes for job creation and food security being announced.

The middle class figures nowhere in this. And this could be a mistake. As reported in the article, credit card spending of the middle class in the last two years has risen by 42%. This too in an environment of high interest rates and inflation and not much hike in salaries. This suggests that the middle class has not entirely put the brakes on spending.

Of course, it goes without saying that too much inducement given for spending has its own set of serious problems. The global financial crisis is a classic case of the American consumer going berserk when spending and that too by taking on debt. And this was a product of cheap and easy money. So obviously there have to be proper checks and balances. But if the past is any indicator, the middle class certainly has the power to assist the growth of an economy. The least the government can do is to reduce hassles that most of these people face in areas of housing and transportation. Indeed, the importance of the middle class cannot be stressed enough and the government could be ignoring it at its own peril.

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01:26  Chart of the day
 
India's current account deficit has been in the limelight in recent times because of the impact it has had on the rupee. The latter has steadily declined against the US dollar and touched a record low of 61.6. The problem is further compounded by the fact that India still imports quite a lot of oil. And when the time for payment comes, the demand for dollars rises, further exerting pressure on the rupee. Today's chart of the day shows, that India's trade balance is quite poor when compared to its peers. Only the US fares much worse than India. The country's BRIC peers notably China, Russia and Brazil have generated surpluses. While the Indian government has been focusing on improving the country's energy security so that the dependence on imports reduces, it also needs to put plans in place to make exports more competitive.

*Data for China, Brazil, India is till June 2013. For the rest it is till May 2013
Data Source: The Economist


02:01
 
It's been more than a decade since the term BRIC was coined. Sadly, the four nation bloc with a delayed inclusion of South Africa, haven't quite been able to live up to their reputations. Economic growth has slowed down and almost all the member nations are facing a bleak future. Amidst such signs came an announcement that the BRICS nations would build their own development bank. Will this bank be able to solve the problems of member countries? We don't think so. Simply because if funds were a problem, we also have the IMF and the World Bank to provide the same. A new development bank exclusively for BRICS is not going to achieve anything different.

What all these countries need is large scale reforms. They need better governance but lesser involvement of the Government. They need access to technology so that productivity can be improved and last but not the least, they need an environment conducive to free and fair competition. If the proposed development bank tracks these parameters before allocating funds, then it would go a long way towards achieving something worthwhile we believe.

02:36
 
Asians, particularly the Chinese and Indians, are known to be very proud of their high savings rate. Well in excess of 30% over the past decade, the high savings rate has been the backbone of consumption boom. In contrast, America is known to be a credit card dependent economy. But it seems the financial crisis of 2007 has manifested the importance of savings in the West too. Thus, while the middle class in America is still struggling with debt, the wealthy have been increasingly better off.

As per Moneynews, the savings rate of wealthier Americans has skyrocketed since the financial crisis. So much so that it has created a huge cash hoard with possible implications for the overall economy. The savings rate of the wealthiest 1% Americans was 37% in April to June 2013 quarter. This was more than three times their 2007 savings rate. It's also up from 34% in corresponding quarter of 2012. Meanwhile, the average net worth per household rose by 14% from 2009 to 2011. Now, much of the nation's net worth is in financial assets, including stocks. So while the rich Americans continue to save and invest more, the middle class lacks the means to follow suit. Needless to say, the wealth gap in American society is getting increasingly wider.

03:21
 
The general elections are just around the corner and we suppose it would be natural for the government to be busy preparing for the same. But does it mean that it should ignore its main job of running the country? In our opinion the answer to this should be no but to the government the answer seems to be a yes. Look at the messy state of affairs in the country's economy and the answer becomes blatantly obvious. This has hurt the performance for the companies as well. As a result many companies both foreign as well as the domestic ones are increasingly adopting a cautious approach when it comes to doing business in the country especially that related to the government.

The latest to join the bandwagon are the IT companies. Big names are shying away from the government contracts due to lack of clarity and payment delays. IT majors are not bidding easily for government contracts as they are increasingly becoming risky from the cash flow perspective. This is sad given the huge size of the domestic IT markets.

IT research firm Gartner has estimated the domestic government technology business to be worth Rs 370 bn in 2013. This would ideally be big business for the IT industry. But the increased risks attributable to the government have made this business lose its attractiveness. Companies prefer to wait for elections to get over to gain more clarity before they resume bidding aggressively for government contracts. But will things improve post elections? Unfortunately you need a crystal ball to answer this.

04:06
 
Until now, the term unemployment was mostly used to relate the economic situation of the West. Due to slowdown many are unemployed in the western world. In fact, in Greece, unemployment has created a huge furore against the government. And now it seems that this dreaded economic term has set its foot in China!

As per an article in economic times, more than 3 m graduates in China are struggling to find jobs this year. It seems like slowdown has impacted the employment opportunities in the nation. With global economic demand slowing exports have fallen. Domestic demand has also taken a backseat. This has created employment concerns. In light of this problem, China's policy to increase the retirement age so as to keep more people employed may not bode well. It may be noted that China resorted to such a policy due to ageing population. But with youth remaining unemployed the government will have to give a second thought to this move. Also, we believe steps must be taken to improve the skill sets of employees. This will improve their hiring prospects. However, for employment levels to show any meaningful improvement the overall export demand must improve. And for that to happen global demand dynamics will have to change.

04:46
 
In the meanwhile, persistent selling activity led the Indian stock markets to fall deeper into the red during the post noon trading session. At the time of writing, the BSE-Sensex was trading down by about 320 points or 1.6%. Losses were largely seen in consumer durables, banking and metals stocks. Midcaps and smallcaps were trading weak as well with the BSE Mid Cap and BSE-Smallcap indices down by about 1% each. Stock markets in other parts of Asia were trading mixed. While Japan and China were up by 1% and 0.5% respectively, Hong Kong was down by 1%.

04:56  Today's investing mantra
"I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies." - Peter Lynch
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12 Responses to "Is the middle class in India being ignored?"

Aswathanaratyana setty

Aug 19, 2013

Yes. As stated by you. Middle class is always get the least from Govt and contribute maximum to ex-chequer. Middle class is always been sidelined & ignored as they do not have the capacity to change the govt.

Like 

AJ

Aug 7, 2013

Middle class are class who are treated by the governments like bastards and orphans and still goes about the life with a weak cry or complain.

Like 

Raju Gianani

Aug 7, 2013

With subject to the huge population in india, Middle class should be given many incentives and tax relaxations with subject to Investments in Residential properties, Relaxations in the fhe form less Stamp Duty on property and other taxes on change in Residential address ie changing houses for personal use , Relaxations in Taxation rates with respect to investment in Equities etc.

Secondly instead of giving incentives to FII'S for investment in equities, such relatxations and incentives should be given to NRI's who can invest as resident indians so that the capital remains inside the country and this will help to control the fall in rupee dollar exchange rate and thereby control the cost of imports and inflation which will benefit the poor and middle class.

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hkjee

Aug 7, 2013

yes

Like 

BGP

Aug 6, 2013

the middle class major population is in metro and mini metro , and interms this metros are more subsidies in terms of transportation, gas , fuel, rent act protaction minimum wage v/s actual is more, electricity etc .hence they are with surplus funds .

Like 

raghavant2001

Aug 6, 2013

Credit card spending has increased because of EMI schemes on smart phones.Your inference that middle class spending is not effected will give your readers an impression that Indian economy is not slowing down

Like 

VIRAF SIGANPORIA

Aug 6, 2013

UPA2 is total failure on all fronts. Congress ka saath, aam aadmi ke saath. What we got was a big slap on our face from congress. If we can't spend money, companies sales will go down, affecting their profits, employees may be laid off, a vicious cycle.

Like (1)

Subhash Chander Goyal

Aug 6, 2013

What middle class? This incompetent & corrupt govt is ignoring India it self.

Like (1)

vinod bajaj

Aug 6, 2013

Yes absolutely the middle class is ignored. The middle class has not stopped spending but its mostly on debt. Everything is sold on emi. This will catch up if growth stagnates.
Moreover, the government should evaluate if the incentives to rich are paying of. my gut feel is that the companies our not passing the earnings made thru these incentives to the staff at all levels. The CEO's are taking fatter salaries and bonuses home and the promoters are minting. Perhaps you should evaluate the results of incentives to companies... where are the profits accrued from these incentives going!

Like (1)

Charles

Aug 6, 2013

India's upper and middle classes constitute only about 30m Households that have the surplus to undertake some form of non food, non essential discretionary consumption. Our problem is not about what incentives needs to be given for these 30m to continue spending but about how fast can we grow the number of upper and middle class households as a proportion of the total household comment

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