The budget was a reality check for the Indian middle class.

Wealthy mutual fund agents, auditors and investment advisors who manage other people’s money have told us this is an anti-middle-class move.

Many of those complaining about the decision are supporters of the Modi government, which makes their discontent on social media all the more amusing because they now feel like their support means nothing.

Before I get into the details, let me make a few points. First, the government should not promote one type of income over another, and all income should be taxed the same way. Removing the indexation benefit is a step in that direction.

Secondly, in India, over 10 million flats have been bought and locked up for investment purposes. It is the flat owners who will suffer as a result of the government’s decision. And anyone who can afford to buy and lock up a flat is not middle class, despite the lack of a proper definition of the term.

So, we are left with another question: What about the wealthy people who supported the Modi government and, as they have recently written on social media, received nothing material in return?

Well, let me tell you a little story. In late July, I was on two tours, one in Oxford and the other in Edinburgh. During the tour, the guides showed us several old buildings with many closed windows. This was because in the 17th and 18th centuries, the government introduced a unique “window tax” based on the number of windows in a house.

The logic was that the bigger the house, the more windows it would have, and having more windows became a symbol of prosperity, hence the tax. This led many people to simply brick up their windows to pay less tax, or no tax at all.

What is the point of this story? There are three things that make a government a government: the right to use legal force, the right to create money out of thin air, and the right to tax. And when a government wants money, it taxes anything and everything. So the removal of indexation benefits should come as no surprise.

In 2018-19, before the pandemic struck, total expenditure by the central and state governments was 26.7% of gross domestic product (GDP). In 2020-21, it rose to 32% and in 2023-24, it was 30.6%.

With the private sector of the economy struggling, governments have had to spend more. In fact, as the Economic Survey 2022-23 points out, more than 300 direct benefit transfer programmes are run by the central government and more than 2,000 by state governments.

While politicians may not admit it publicly, they know that a large segment of the population is struggling with the aftermath of the pandemic. Through such schemes, they have tried to do the right thing and also tried to address that important vote bank.

Moreover, technology has greatly improved the delivery of such programs. As Raghuram G. Rajan and Rohit Lamba write in Breaking the Mould: Reimagining India’s Economic Future: “Ironically, as technological advances have improved the delivery of targeted benefits… the top brass in the state or national capital can now identify with the delivery of specific benefits, such as cash transfers, toilets, foodgrains, gas cylinders, or educational loans, and build a direct personal relationship with the voter.” And all this costs money. A lot of money.

Total spending by central and state governments has increased over the years. In addition, there is pressure to reduce the overall government debt. And given that the central government shares a significant portion of the taxes it collects with state governments, there is enormous pressure on it to collect more tax money overall.

It didn’t help that the central government cut the corporate income tax rate in September 2019 in the hope that it would encourage companies to invest more. In 2018-19, corporate tax collection amounted to 3.5% of GDP.

It was 3.1% of GDP in 2023-24, despite higher corporate profits. It is expected to be 3.1% even in 2024-25. Now, such a narrative-driven government cannot reverse this move, given the uncomfortable questions that would arise.

Hence, among other things, the government will have to try to collect higher taxes on income. In 2018-19, this amounted to 2.4% of GDP, rising to 3.5% in 2023-24 and is expected to rise further to 3.6% in 2024-25. Taxing capital gains at higher rates will help improve tax collection.

So we’re left with the wealthy trying to pass themselves off as middle class and getting mad about the removal of indexation benefits. The joke has always been on them because someone has to pay the government bills. They just might finally understand.