Why A Full Blown Depression Will Be A Status-Quo For The Poor And A Blessing for the Middle-Class.
Data Inputs as on 10 Aug 2023
We will capture the cost of few daily use commodities, fuel & rentals in Kochi
- White Rice: 45 per kg
- Brown Rice: 65 per kg
- Beans: 140 per kg
- Carrot: 94 per kg
- Tomato: 119 per kg
- Ginger: 360 per kg
- Green Chilli: 80 per kg
- Potato: 44 per kg
- Onion: 32 per kg
- Apple: 260 per kg
- Banana: 92 per kg
- Milk: 56 per litre
- Coconut oil: 175 per litre
- Petrol: 107.22 per litre
- Diesel: 97.24 per litre
- Rentals for a 1000 sq. ft house: 15000 + maintenance per month
- School Education expense per child: 5700 per month
- House Maid: 19000 per month
- Electricity Residential: 7 per unit
- Mobile Expense: 155 per month
- Internet Expense: 470 per month
Scenario
Items mentioned from (1) to (15) are much above their long term average. Whereas the items (16) to (21) are fairly priced. Let us also consider a household with a monthly take home income of Rs50000 for our example. When we say a household, we assume a family of 4 with 2 school going children.
- If both the husband and wife are working, then they might have to employ a maid to look after the children’s needs, cooking & cleaning.
- If we assume they drive 10km to work daily, then their per month fuel expenses will be approx: 6160. If only 1 person is employed, then the fuel expense will be 3080 per month.
- The EMIs, uniform, books, eating out expenses are omitted for this discussion.
From a headline level an income of Rs50000/month looks very attractive for the household. Our GDP per capita (2021) is only Rs14291. So in our case it works out to be: 28583 per household. The example of 50000 per household is 74% above the per capita average. Yet this household will not be able to survive without borrowing money from outside.
Rentals + Education(2 nos) + Mobile(2) + Internet + Travel (2 nos) will cost them: 33340. The other expenses for rice, vegetables, milk will definitely exceed Rs16660 and the household’s income will be lower than their expenses.
Is this the reality? No — the reality is much worse. The cost of living has gone up multifold and any increase in income is unable to match it. The easiest work around adopted by middle class families is to cut short their consumption. If the onion prices are spiking, they choose not to buy if. If tomato prices go up, they avoid that. Most of them resort to borrowing money to just keep their life moving ahead.
People think the best solution to this problem is to upgrade the household’s income. If we increase the household income by 50% i.e. 75000 per month, most likely it will fall short of the expenses in the next 1 to 2 years. Thats because the real cause of this problem is not income, but expenses. Except for internet and mobile bills — every other expense in our country has gone up. See the table below of rates of few of these commodities in 2012. Data source: click here
If these items have become pricier, does that mean the farmers are richer today than in 2012? Absolutely not — in fact they are poorer and miserable. The intermediaries who procure these from farmers and sell it in the hypermarket are millionaires now!
Honestly let me ask you a question, why would you want to buy vegetables from an air conditioned multi floored hypermarket at a prime real estate location? The tomato you buy from this super speciality market has to be priced to include their rentals, electricity charges & operating expenses right?
Knowingly or unknowingly you and I were responsible for the wipe out of roadside vendors, small shops that gave us affordable vegetables, fruits and other daily need items. The supermarkets lured us to shop with them by dipping their prices initially and when the competition was gone — they added extra premium on it.
Are you poor or middle-class? Poor people are the assets of the Govt. policies and reform. Firstly because they are in plenty and form a good vote bank. Secondly — they never bite back. If something is denied to them or taken away from them — they hardly protest. Most of the benefits of the Govt. goes to them like the direct benefit transfer (7.16 lakh crore in 2022–23), food rations, medical assistance, rural developments, job guarantee schemes — read the CAG audit here.
The real poor are taken good care of and rightly so — because they are the underprivileged section of the population. But the income earners who form the middle class face a double whammy. First they fund the Govt’s expenses by either spending or taxes. Secondly they do not get the benefits similar to the poor. So mostly the lowest tier of income earners are living a miserable life than the poor.
What is the solution to this? The best way(my personal opinion) to end this crisis is by expanding agriculture penetration. Government should enter into this domain directly — lease its land and employ the farmers on monthly wages. The cost of farming, fertilizers, harvesting and marketing has to be borne by the Govt. and a fair share of salary given to the farmers for their effort. This solves 2 important problems — 1. Farmer suicide & 2. Fertilizer subsidies. Since it will be a PSU the final cost of products will be fair and the majority of the population will be able to consume.
How will the economy correct itself? The economy has an internal reset clock. The free market theory will help auto correct the prices soon. When it does — its called a recession first and then a depression.
If the expenses are so high compared to the income, it will create a job churn initially wherein people jump to high paying jobs to maintain their current lifestyle. But for the business owner — its an increase in costs. The second phase kicks in when the business owner is unable to operate due to operational costs (salaries) and may wind up the firm or give away customers to the bigger competitor.
This bubble cannot last forever, a stage will come when the consumption will not grow as the income has stagnated. Here even the big firms also feel the heat. The bulk of their produce will remain unsold and their services unused. During this extended phase the bigger companies will be forced to downsize their manpower or reduce their salaries.
This is when the recession & depression kick in. It may throw a majority of people out of jobs, but the blessing comes in with the reduction of expenses. In India we have rarely had an extended recessionary or depression phase like the US & Europe. But as it stands — the situation calls for one.
The poor will continue to be supported by the government via their welfare schemes so their lifestyle is unaffected. The middle-class will take a beating initially with a loss of income, but in a while they will be able to do okay as their living expenses will come down.
What is better? A salary of Rs50000 per month with an expense of Rs60000 or a salary of Rs25000 per month with an expense of Rs20000?