The Biggest Beneficiaries of Demonetization
Historically, middle-class population is reputed for revolutionizing both politics and economy. The industrial revolution, which changed Britain’s fortune hundreds of years ago, had in fact thrived on middle-class values. With measures for demonetization in place, India’s middle-class appears to be setting the tone for a new revolution.
Blurb (2): As the note ban bites, every consumer price is going downwards, from daal to housing rents and education fees to income tax. The biggest winner is the middle-class, because their salary is not going to go down. More jobs will be created for them in the days to come, as the rich will be forced to invest in enterprises rather hide money in real estate and gold.
By Narayan Ammachchi
As demonetization completes its full course and digital economy takes shape, the middle-class Indians, the biggest income tax payers but the least beneficiaries of government subsidies, have begun to cheer.
Middle-class in India account for almost half the size of the country’s total population, and their number has been rising by the day. According to a study by two Mumbai-based economists, the number of middle-class in India doubled in the space ten years, between 2004 and 2012.
The note ban has left banks brimming with cash. Therefore, the Reserve Bank of India (RBI) is showing all signs of cutting interest rate drastically. Another noteworthy impact will be the increase in income tax slabs. In other words, the government is most likely to free those earning less than 5 lakh rupees annually from paying income tax. Today, everyone earning more than 2.5 is required to pay income tax.
Another advantage for the salaried class is that there is possibility of the government exempting tax on allowances such as conveyance allowance, medical reimbursements etc. These moves will increase the disposable income of the middle class household.
Third major impact from demonetization is the fall in real estate prices. Skyrocketing property prices were such a curse on the middle class was that, until yesterday, those salaried people who bought residential sites in urban neighborhoods had to spend their lifetime to repay their home loans.
Today, if you have already bought a site, the loan amount you are going to pay will be lessened. If you have bought a site yet, then this will be the ideal time. Not only the prices are bottoming out, but there are also easy availability of loans at lower cost.
The biggest beneficiary of digital economy will always be the middle-class because digital transaction pushes down the prices of consumer goods. As inflation dips further, their buying power will increase dramatically. In other words, they will be able to buy more amounts of goods with the same amount of money than in the past. If you had to spend 50 lakh rupees for residential site, they will soon find a similar site for half of that price.
The demonetization has now prevented people from laundering money in real estate, NGOs and educational institutions.They have been forced to go online or pay up hefty charges in tax.
A combination of demonetization and digital transaction puts an end to hoarding and inflating prices artificially. Therefore, today you are seeing a drop in the prices of most of the goods you consume. Prices of dal, for an example, has almost halved from their annual highs of 250 rupees per a kilogram.
The retail inflation dropped to its lowest level of 3.63% in November. Digital economy will keep the prices under control by keeping the hoarders at bay. This is the biggest positive outcome of the demonetization and digital economy.
Residential properties in urban neighborhoods have not yet gone cheap, but they are certainly on their way down, because there are hardly any buyers in the real estate market. Some predict that property prices may slide by 40 or 50 percent.
Property owners will not give up in this game so easily, but they may have no option but to get off the market once NarendraModigovernment starts seizing benami properties.
Like or dislike, it is a fact that high real estate priceshave long hampered the growth of entrepreneurship, denting the country’s competitiveness in the global marketplace. Cheap real estate will stoke business expansion, creating jobs for millions of people.
Digitalization paves the way to clean up the economy, making it vibrant and transparent. Therefore, in the days to come, you will hear more stories about the increase in government revenue. The more the government earns the lower will fall the tax rates. That means, middle-class will soon find its tax burden ease.
Before demonetization, some municipalities would collect barely 5 crore in electricity bills. Now they are collecting 15 crore.
Lucknow Electricity Supply Administration (LESA), for an example, has seen its revenue grow several fold after the note ban. It has reportedly collected more than 100 crore for the month of November. One consumer paid 45 lakh in cash to pay off an outstanding bill.
A consumer in a VVIP division cleared his outstanding bill of Rs 45 lakh, which he had been contesting for years together while two others in the old city area cleared dues of Rs 27 lakh and Rs 28 lakh, respectively, in cash.
Over the past two decades, poor and middle-class people in towns and citieswere forced to spend their hard-earned money for securing admission of their children in schools. This practice is going to stop in the months to come.
That’s because all private education institutes have been told to pay employee salary through bank accounts. In addition, they now have to receive tuition and other fees in electronic mode.
In this post-demonetization era, banks have been told to levy a huge surcharge on cash deposits. Similarly, they make mention of your pan card number every time you withdraw more than 30,000 in cash. This makes elite educational institutes, most of which are run directly by politicians or their associates, transact in transparent digital mode.
As more revenue draws more tax, educational institutes will reduce fees on everything, from tuition to donation.
Chit fund companies
In the past decades, thousands of poor and middle-class Indians lost billions of rupees by chit funds and private financiers. Digital economy will put an end to this black business. Formal banks will now take away the business from these shady financiers.
As private financiers cannot find hard cash to run their operation, they will give up on their business once and for all. Moreover, middle-class will find formal bank loans cheaper than the exorbitant interest rate that private financiers impose on their loan.
In the past few years, there has been hundreds of stories of private financiers making off with the hard-earned money of depositors. Demonetization has cured the menace of private financiers once and for all. So, there will be lesser chances of middle-class Indians getting duped by private finances.
The Growing Power of Middle-Class
India’s middle-class are a powerful group, both politically and economically. It is a common belief that if a child from a middle-class family is freed from the shackles of money, he will achieve more than what his peers from rich or poor families will achieve.
Of course, there is no universally accepted definition for middle class and it is hard to define who can be categorized in middle-class and who is not. It could be however true to say that those with APL cards (above poverty line) are middle class and those with BPL cards (below poverty line) are poor.
But it is certain that the expansion of middle class is a sign of great economic transformation to come. In his book, Farewell of Alms, economist Gregory Clark argues that the spread of middle class laid the foundation for the Industrial Revolution in Britain. It is this revolution that led to economic transformation in the West.
World over, we have seen the rising share of middle class reshaping 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. The movement against corruption, which did everything it could to tarnish the image of the previous Congress –led government in the center, was in fact a middle-class movement.
With demonetization dealing a deathblow to corruption, middle class can now get things done far easily. Cash is the root cause of corruption, because it is the necessary lubricant for all black-market transactions.
In addition, high property prices had also pushed up house rent in urban areas, increasing the living cost for millions of middle-class families. More than anything else, it had directed capital from being invested in manufacturing and services. Now, with little option to launder cash, the rich will choose to reinvest their money rather than hide it in real estate and gold. Such investments will create jobs and once again the biggest beneficiary will be the middle-class.