Demonetisation: How Neo Middle Class Is Redefining The Political Landscape

By now everybody is probably sick of another article on demonetisation! Much has been written about the economic ramifications, but the significance of demonetisation transcends mere economics. The palpable populist appeal of demonetisation marks another milestone in rise of the neo middle class. A million mutinies are coalescing into a nationalism of the masses as increasing number of poor transition into the neo middle class. Concomitantly, the spread of middle class values is causing a transformation in the nature of populism – from concrete freebies to abstract notions of anti-corruption, rule of law, and national interest. From this perspective, the symbolism of demonetisation – attacking corruption and protecting national security – far outweighs the risk of economic disruption. And, the Prime Minister, who embodies the hopes of the neo middle class, who was propelled to power by this class, has signaled with demonetisation that he is alive to their aspirations.

Liberalisation And Burgeoning Neo Middle Class

Estimates of India’s middle class vary wildly for a variety of reasons. First, there is no universally accepted definition of middle class. The definition of middle class for a multinational company is not going to match that of a small restauranteur in India or that of a private school principal in a mid-tier city. Second, there is no hard data on household income in India. Estimates of household income in India is mostly indirect and subject to significant measurement problems. Third, income alone is an inadequate proxy for complex sociological phenomena called the middle class, especially so in the incredibly diverse Indian context. Thus, you have estimates of middle class ranging from 2 per cent to 55 per cent. We are reminded of the fable of the elephant and six blind men when it comes to the estimate of the size of the middle class.

In my mind, the most revealing statistic is that fully 49 per cent of households self-identified as middle class in a 2013 survey conducted by the Lok Foundation and the Center for the Advanced Study of India (CASI) at the University of Pennsylvania. Detailed data from National Council of Applied Economic Research (NCAER) suggests that Indian people are not delusional! The NCAER does an excellent job of slicing household data in a number of ways, which allows analysts to draw their own inference. The following tables are from NCAER:

Without belabouring the issue, I think upward of 40 per cent of Indians have made the transition from utter destitution and poverty post liberalisation. Whether you call it middle class or whatever, they certainly feel middle class. This group, classified as ‘aspirers’ by NCAER, has been widely referred to as the neo middle class by analysts and political commentators. Strikingly, the rise of the neo middle class has gone along with an increase in the percentage of nuclear families, who now constitute 70 per cent of households up from 59 per cent a decade ago.

Emerging Middle Class And Changing Political Discourse

In the book, Farewell of Alms, economist Gregory Clark argues that the spread of middle class values was instrumental in pulling Britain out of the Malthusian trap and setting the foundation for the Industrial Revolution in the country. Whether we agree with Clark or not, unquestionably, a rising share of middle class reshapes the political discourse. After all, the French Revolution was not launched by starving peasants but by the newly emergent middle classes who wanted a seat at the table.

In India, too, the emergence of the neo middle class is fundamentally altering the political landscape. Issues of survival are being overshadowed by aspirational concerns. The UPA had done a fairly good job of bringing down poverty, but the CASI survey found that the overriding concern of the electorate leading up to the 2014 election was economic growth and that the economy had fallen short of rising aspirations.

Cross-border terrorism can no longer be blithely ignored by the government. The UPA was of course seen as inept in this regard, but even the present government may have been induced to undertake “surgical strikes” given the palpable anger in the aftermath of the terrorist attack at Uri. Clearly, the desire for overt demonstration of national resolve is a neo middle class phenomenon, which is causing great discomfiture to the elites. Recall, when a popular journalist condemned the middle class as “army-worshipping, democracy-hating, yearning for machismo, abusing independent women, middle class India is such a drag.”

Corruption became a major issue with the enormous popularity of the Indians Against Corruption (IAC) movement, which by all accounts was a middle-class movement. Indeed, that it was seen as a middle-class issue was a key factor behind Arundhati Roy distancing herself, saying that she “would rather not be with Anna” and excoriating the movement for wanting to preserve an unjust order. Today, Roy is losing the battle of ideas but it was not always so. In 1969, the brilliant filmmaker, Mrinal Sen, made a movie that launched the genre called arthouse cinema. The movie, Bhuvan Shome, narrates the ‘corruption' of an upright government employee. As Sen said, “Our intention was to ‘corrupt’ a bureaucrat suffering from Victorian morality.” Sen lays bare the left’s, and therefore Indian intelligentsia’s, utter contempt for middle-class values. As long as the middle class was a miniscule minority, the political establishment could afford to play along with the left. However, the ground has been shifting with the emergence of the neo middle class and politicians, unlike the intelligentsia, have to win elections.

Demonetisation And Beyond

Demonetisation does not directly affect the flow of black money or corruption. It only affects a small proportion of the stock of undeclared wealth. Yet, cash is a necessary lubricant for all black-market transactions. Unquestionably, demonetisation will have chilling effect on such activity. Meanwhile, the likely massive shift toward electronic payments will make tax evasion more difficult. If the government follows up with actions against benami transactions in property, then it will go a long way in reducing the footprint of black money and establishing respect for the rule of law. Furthermore, a likely dramatic decline in real estate prices will have salutary effects on the economy. Abnormally high real estate prices are an impediment to development. They facilitate rent extraction and divert capital from productive investments that would lift living standards. When rent extracts a significant part of the economic surplus, it encourages speculation and reduces incentives for productive wealth creation. Reducing such rent extraction could turbocharge India’s development.

Respect for the rule of law is the foundation of civilised society and that separates developed nations from the rest. Corruption, especially the visible petty corruption that entangles almost every Indian, makes mockery of the rule of law. If the government follows through on demonetisation with other measures that manage to reduce corruption, then India will take a quantum leap in development. Even if the demonetisation move fizzles out, the inexorable rise of the neo middle class will continue to push for changes that are driven by so-called petty bourgeoisie values.