Tough 2018 for India's middle class

Life of India’s middle class, pegged at 300 million by Deutsche Bank Research, is taking a curious turn in 2018. Inflation and higher interest rates are hanging over their head like a Sword of Damocles. The middle class, already stifled by the lack of propensity to spend, is now staring at two prospects – of longer tenure of their home loans and lesser money in their hands.

A week after the Economic Survey, the Reserve Bank of India (RBI) too raised concerns over rising inflation last Wednesday. The inflation outlook, according to the central bank, is “clouded by several uncertainties”. It said along with the HRA increases by various state governments, the rising crude oil and commodity prices, riding a pick-up in global growth, may push up inflation. What’s more, RBI cited a few measures by the government for the expected spike. One is the move to revise guidelines for arriving at the minimum support prices (MSP) for kharif crops and the other, an increase in customs duty on a number of imported items. The fiscal slippage as indicated in the Budget could also impinge on the inflation outlook. It has broader macro-financial implications, primarily on economy-wide costs of borrowing that have already started begun its northbound journey. This, RBI suspects, may feed into inflation.

Thank god, Michael Patra, executive director at RBI, was in minority last week when other five members of the RBI’s monetary policy committee voted to keep policy rates unchanged. Patra was the lone dissenter who demanded a 25 basis points hike. But, it is just a matter of time that banks will start raising loans, especially retail loans.

On its part, the government faces a double whammy. The Budget has reiterated its promise to help farmers by hiking MSP (to cost+50%), leading to stock market pundits predicting a spurt in inflation. Analysts believe the inflationary impact will depend on the extent of MSP hikes as every 1% rise in MSP adds around 10-15 basis points to the headline CPI inflation. The irony is that food items are sold in the market at several times its production cost, most of the margin being pocketed by the ruthless middleman.

Pulses and oilseeds have seen an increase in sowing, but this has translated into unusually low farmgate prices (below their MSP), again affecting farm revenues. The so-called TOP perishables (tomatoes, onions and potatoes) have meanwhile fluctuated between high and low prices, engendering income uncertainty for farmers.

Farming in India continues to be at the mercy of rain gods. According to the Survey, the growth rates of agriculture & allied sectors have been fluctuating at 1.5% in 2012-13, 5.6% in 2013-14, (-)0.2% in 2014-15, 0.7% in 2015-16 and 4.9% in 2016-17. As per the Fourth Advance Estimates for 2016-17, the country has achieved a record production of food grains -- estimated at 275.7 million tonnes, higher by 10.6 million tonnes than the previous record production in 2013-14. Both rice and wheat production has reported a new record in 2016-17.

If the government is keen to double the income of the farmers by 2022, higher MSP is the least that it ought to ensure. But it has to reign in all traders and brokers, and ensure that the revised MSPs do not hit the retail price. Meanwhile, the economic convergence of India -- the process of poorer countries catching up with their richer counterparts and closing gaps in standards of living -- may have got a little longer.

The writer is the editor, DNA Money. He tweets @AntoJoseph