This past year has been politically eventful for both and India. Next year promises to be even more so.  While the events might look different, the same macro forces are driving the events in our opinion.

America

As we enter 2012, all eyes are focused on the Iowa Caucus on January 3. This is the first round of the uniquely American game of choosing a nominee to challenge the incumbent for the Presidency of the United States.

Look back to this time last year. The Republican party had won a huge victory in the November 2010 elections and seized political control of the House of Representatives. Their momentum was acknowledged by President Obama who moved to strike a compromise with the Republicans to extend the Bush tax cuts. This mood did not last long.

It was followed by a bruising battle in the summer of 2011 for the extension of the U.S. Debt Ceiling. That process proved so dysfunctional that no one wanted a repeat in the final political battle of 2011, a battle to extend the payroll tax cut for about 160 million Americans.

Unlike a year ago, this time the House Republicans caved in. They had been boxed in by a more confident President who fought and won a tactical battle. The Republican nomination process has been a debacle of sorts, with fatally flawed candidates rising to the top of Republican polls and falling seemingly into political oblivion. With each turn, President Obama looked stronger and more capable.

But all this, we think, is more about optics than reality. The election of 2012 is likely to revolve around the condition of the U.S. economy barring a military conflict between Iran and America. But even the economy and discussion about how to improve it might be more optical and superficial than real. Why?

Because, there is a tectonic shift underway in American society. America used to be a society dominated by taxpayers. Since 1773, taxation and political representation have gone hand in hand in America. American society has been built on the premise of the American Government being responsible and responsive to American citizens about how America’s tax collections are spent. This is the core reason behind the almost uniquely American distrust of big Government.

This America is becoming passe. Today, about 48% of Americans do not pay any income taxes. So about 48% of Americans now take from the American government without contributing to it. Barack Obama is the first American President whose election symbolizes the united efforts of this half of American society. He knows it and that is why his economical policies, right from his inauguration, have been essentially distributive and oriented towards providing government resources to the less advantaged.

The American taxpayers instinctively understood that President Obama was engaged in transferring wealth from taxpayers to non-taxpayers. This realization led to the political explosion we call the Tea Party.  The 1773 Tea Party revolt was against Taxation without Political Representation. The 2010 Tea Party revolt was essentially against Political Representation without Taxation.

The taxpayers won the first battle in November 2010. The next important battle is the Presidential election in November 2012. That may be the last Presidential battle won by taxpayers in this long war. Because, the demographic tide is inexorably moving towards a majority of non-taxpayers in 2020 or perhaps by 2016.

In this setup, we see the Democratic party slowly morphing into a party of the non-taxpayers plus a slice of the very wealthy and the Republican party becoming the voice of the taxpayers who are unwilling to have their earnings taken away from them. The demographic tide, as we said, favors the Democratic party.
So we expect the Republicans, if they win the White House and keep effective control of the Congress, to take steps to build a policy framework for Less Representation for Non-Taxation. These steps might include changing electoral districts, making voting registrations difficult for non-taxpayers and even imposing minimum income tax levels (perhaps like the one already proposed by Congresswoman Michelle Bachman) on all Americans. We might see easier and increased immigration policies for wealthy and highly educated immigrants.

We see this battle shaping up as the central conflict or a civil war within American society during this decade. So any one who pines for a united, ‘can’t- we-all-get-along’ American society may be hoping against hope.

We feel so because we know of a similar battle on the other side of the world, a battle diametrically opposite to the one that will be fought in America. That battle is taking place in India.

India

As 2011 ends, we see Indian society in the grip of its own revolt, a revolt against widespread corruption in the government at all levels. But like in America, this reason is basically optics. The real reason for this revolt is the tectonic shift underway in Indian society, a 180 degree opposite shift to the one occurring in America.

Since its independence in 1947, Indian society has been a society dominated by non-taxpayers. Even today, about 75% of Indians do not pay any income tax at all. As a result, Indian Politics and Indian Government has been dominated by policies that distribute free services and goods, that seek to distribute income and wealth from people who earn to people who need.

The natural result has been corruption, endemic corruption:

• corruption in the business class that tries to hide much of its income from tax collectors,
• corruption in the administrative machinery that distributes government goodies to the poor, and
• above all in the political class that seeks to build great personal wealth while in office after spending a lot to provide free goodies to gain political office.

The patient, quiet sufferers in this machine were and are the helpless middle class – the people who are unable to hide their income, the people who need services from the government – the middle class, especially the salaried middle class. But this hapless middle class has slowly but surely grown in size and confidence.

Today, this group is anywhere between 150-300 million strong, not strong enough to dominate Indian politics electorally but strong enough to create a revolt that can bring the Indian Government to its proverbial knees.  In 2011, this middle class got a leader that it can rally around – a symbol more than an actual leader, a Gandhian figure who lives a simple life and is above personal corruption.

The Congress Party, the party in power, is the leader of traditional Indian politics – giveaway policies and maintenance of vote banks by rural politicians who today are screaming bloody murder of parliamentary democracy by what they term as non-elected civil society.  The opposition parties, especially ones with a more urban political base, are supporting this revolt because it is their best chance to topple the Congress Party from power.

The political players in this war as not as clear cut as the two parties in the battle for political power in America. But the societal shift is the same and the demographic forces are arrayed similarly. The big difference is the direction and relative ascendancy.

There is an inexorable tide in Indian society towards higher income both in the urban and rural segments. Rise in incomes makes people more independent, more demanding of better conditions and prospects for a better future for their children. This is what they called the American Dream for the past century. People who strive for such a dream are willing to contribute to Government as long as their contributions are managed carefully and for the greater good by their chosen Government.

This inexorable tide is also reducing the societal chasm between various social segments or the Portuguese term “castes” imported by the British into India. Read what Lydia Polgreen of the New York Times wrote this week:

• A recent analysis of government data by economists at the University of British Columbia found that the wage gap between other castes and Dalits has decreased to 21 percent, down from 36 percent in 1983, less than the gap between white male and black male workers in the United States. The education gap has been halved.

The battle we see in the streets of urban India, the battle seemingly against corruption, is really a battle of the rising middle class for greater control of their own tax payments, of greater say in the policies of the  Government elected by the poor rurals. Slowly rising rural incomes will bring in more rural participation in this revolt. So we expect this revolt to broaden out during this decade.

This long battle is the same battle as the one that will rage in America, but one that will look diametrically opposite.

America & India – How will they look in 2020?

India has always had a large, seemingly permanent underclass that dragged down the entire country. India has always seemed a hopeless cause, a society that would one day become great but never does. The precipitous fall in the Indian Rupee has united all the Indo-pessimists and perhaps rightly so. No country in the world seems so utterly dumb and incompetent as India does from time to time.

But we see clear evidence that, underneath the stupidity, the chaotic surface, the utter failure of all Indian Institutions, there is a major shift towards a stronger, richer, smarter and more confident society. And luck favors the diligent. The current collapse of the Indian Rupee may actually be just the medicine India needs to make Indian labor, Indian products, India’s services more competitive. The collapse of the Indian Rupee might be the medicine that forces Indian importers, including the Government, to become more efficient.

Sometimes, we think Chairman Bernanke & Secretary Tim Geithner might be looking at the fall in the Rupee and asking “why can’t the U.S. Dollar fall by 10%”? Not so precipitously of course, but slowly and inexorably. Because a weaker U.S. Dollar is a consummation they devoutly wish for. Because that is the medicine to make America’s underclass competitive in low level manufacturing.

Over the past 20 years, America has built up its own large and seemingly permanent underclass. This was ignored and glossed over in the technology bubble of the 1990s and during the credit bubble in the last decade. Now it cannot be ignored because it is on the verge of gaining long term political power.

In other words, America will begin to deal with the problem India has dealt with for the past 60 years. This may be a tougher problem for America. It never expected to have this problem. And this is a problem that has come about partly due to the best intentions of the American people.

But America will, after much loud and sometimes vitriolic debate, get around to finding solutions to its financial and societal problems. We feel confident that all segments of American society will take steps to get control of America’s debt, to cut down on wanton government spending. As American society again becomes financially lean by the middle of this decade, America, we believe, will once again welcome highly educated immigrants, the type that will tempt companies to move jobs to America.

So we see both America and India taking different looking steps to become stronger politically and economically in this decade. They can learn a great deal from each other. We think they already are and they will continue to do so.

Therefore, we are willing to bet, here and now, that despite their vividly obvious differences today, America and India will look a lot similar in 2020.

(This post originally appeared on Macro Viewpoints and has been republished with the approval of the author).