The most important segment of India’s economy has been the middle class, which generates the consumer demand which runs the economy. Consumer demand constitutes about 60% of India’s GDP and because it has dipped of late, so has our growth rate. If the middle class does not buy, corporate sales and profits go down, as we are witnessing in the case of the likes of Maruti Udyog Ltd., and also two wheeler manufacturers. But with the unemployment in India being at a 45 year high and the MSME sector which represents our middle class entrepreneurs struggling to survive, the household income of the middle class has receded, and they have reduced their consumption, which threatens to derail India’s ambitious growth plans.
If the income of the middle class has deteriorated, so has there been a steady erosion in the value of its household wealth. A large part of the wealth of the middle class is parked in real estate, in its dream house that it buys, with its precious savings. With India’s real estate sector in a slump for over seven years, the prices of real estate have come down and have thus eroded the core wealth and capital build up of a middle class family, whose real wealth often resides in its house property and also provides it with a sense of safety and security. While real estate slumps are not unusual and are a routine cyclical affair, like the downturn in real estate prices that India witnessed in the late nineties onwards, but that being cyclical, it was temporary and the real estate markets did finally recover and make up for the reduction in prices during its slowdown phase. It was a temporary dip in real estate, which recovered and did not erode the middle class wealth in the long run. It only reinforced the belief that the safest wealth for India’s middle class was the house property that they bought.
It was also believed that with India’s rising population, the demand for houses will only go up and will keep the housing prices in a buoyant state. This also therefore did not adversely impact the housing finance companies, which had given housing loans to the middle class buyers and that was because more so during the real estate slump period, there was no dip in household income as we are presently witnessing due to the rising unemployment. Nobody really then suffered in the long run, neither the borrower, nor the lender and household wealth on account of real estate remained robust. This time, with the job scene being so bad, a dip in household income and savings and the prolonged slump in the real estate market, the real wealth of the middle class as embodied in its house property has dipped and will take many years to recover.
The next asset base of the middle class lies in its share market investments, where due to a host of factors, market valuation and wealth has eroded, except for a few shares. The middle class has lost its wealth invested in shares of bankrupt and fraudulent entities like ILFS, Jet Airways etc. it has lost its wealth in shares of banks and NBFCs, both public and private sector, it has lost wealth due to the dip in corporate profits on account of factors like the pruning of consumer spending, as in the case of FMCG and automobile companies, as also in case of shares invested in the small cap MSME sector, struggling to survive. And as if that was not enough, the government move to increase the minimum public shareholding in listed companies to 35% of their share, from 25% at present. It is expected that about Rs. 4.50 lac crores of promoter shareholding will be unloaded in the share markets, leading to further erosion in share prices, due to an increased supply of shares in the markets. While it is a good move of the government that will deepen India’s capital markets in the long run, its immediate effect will be a sharp dip in share prices of companies.
Yet another factor causing an erosion of household middle class wealth is the severe stress in the MSME sector, where huge bank loan defaults are imminent. Money of the middle class lost in ponzi scams is not being discussed, but that is a factor too. And while the wealth of the core assets of the middle class viz. real estate and investments is being eroded, there is no dip in its expenses on account of children education, marriage, medical expenses for which they save. That’s a national crisis in the offing.