The Middle Class as a tool of Economics

The recent announcement of the implementation of the Seventh Central Pay Commission (CPC) recommendations was received on expected lines. The media made it out to be an extravaganza for a bloated and inefficient bureaucracy bereft of any linkage between performance and remuneration. On the other hand, government employees felt it fell short of expectations — as is usually the case with any kind of pay hikes.

But the government has a good economic reason to push the increased salaries into the economy: to push up the demand curve and bring about a spurt in expenditure. The increase in salaries is likely to bring in about Rs. 1.02 lakh crore into the economy, of which about a fourth is likely to be consumed by taxes. The remaining amount would create demand in the sectors that would benefit; apart from retail and FMCGs, these are automobile and real estate. The main beneficiary of this increase is the middle class that is still predominantly interested in government jobs.

After the CPC in all probability the State governments will follow suit. Thus funds would be released to the middle class that would in turn create demand by becoming consumers for all the economic activity unleashed on account of additional disposable income in their hands.

Here the middle class is used as a lever to jack up economic activity, and it is not the first time this has been done. Though there is nothing wrong with it, this has had its fair share of trials and tribulations over the seven decades of independent India. We can see how it has since evolved.

Independence was a dream-come-true but it came along with the big blow of Partition. The nascent nation found itself facing the onerous task of building itself, its fragmented polity and the tattered economy. But the post-Independence euphoria was under the spell of idealism, symbolized by the egalitarianism embedded in the theories of socialism and communism. The emerging economies of that time were impressed by the centralized and controlled structures instituted by that thinking to shake the economy in a manner beneficial to all. Indian politicians were no exceptions and took ideas from the controlled economies of the USSR and emerged upon planning our economy in a manner that combined the advantages of socialism and capitalism. We ended up having a mixed economy where initially the focus was more on planning and government spending. This era marked the beginning of the Planning Commission, further continued under the aegis of Professor Mahalanobis (from the Second Five-Year Plan onwards), and we saw different Five-Year Plans being formulated and implemented. The first Five-Year Plan was focused on agriculture, followed by the second, which emphasized on industrialization with public spending that gave rise to many public sector undertakings house loan. These Plans were subsequently followed by the third, fourth, so on, but over a period of time the Planning Commission lost its sting and was becoming more of an advisory body whose suggestions were only selectively heard.

The mixed economy implied equal partnership of the public sector and the private sector. However, the government played the lead role and the private sector the second fiddle. Thus, the major task of shaping the economy was taken over by the government by taking unto itself its planning, direction and focus.

For a planned economy, the government needs to have adequate funds at its disposal so that it can channel those in the sectors which it intends to develop. The government in the initial years tried to arrange these funds through the following means: (i) Borrowing from foreign institutions, (ii) Raising public debt, (iii) Incentivizing the public to save by offering bonds and such-like, (iv) Printing more money, and (v) Collecting taxes.

[Source: http://www.thehindu.com/opinion/open-page/open-page-the-middle-class-as-a-tool-of-economics/article9150799.ece]

Hi, I am Shreekant working with Housing Finance company as Home Loan adviser owing good knowledge of Home loan and personal loan so on.