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India’s Dwindling Middle Class: A Red Flag for Our Future

Cover Story
Salman Anees Soz
Dy Chairman, AIPC & Regional Coordinator, AIPC North Zone

In April 2021, the New York Times reported on the devastating toll of Covid-19 on India’s middle class.1 The report starts with the story of Ashish Anand, a former flight attendant and fashion designer who borrowed money and put his life savings into setting up a clothing shop in outer Delhi. This was in February 2020, just before the pandemic struck India. Two months later, Anand shut his shop down, his dream falling apart. The New York Times published a picture of Anand’s family. In the picture, the beautiful kids are eating a meal. Two refrigerators, a sign of middle-class comforts, stand in the background. A year later, this small family and millions of others in India face the prospect of slipping out of the middle class and into poverty. Anand’s family now depends “on handouts from his aging in-laws. Khichdi, or watery lentils cooked with rice, has replaced eggs and chicken at the dinner table.” Anand reports that sometimes his children go to bed hungry. This scene was unimaginable just a few years ago.

In 2007, McKinsey Global Institute called India’s growing consumer market a “bird of gold” and the Indians rapidly joining the ranks of the middle class, the “next big spenders”.2 McKinsey’s forecast captured the momentum and optimism of the time—they believed that India’s middle class of 50 million would expand to 583 million (41 percent of the population) by 2025.3 And for a while that really did seem possible. However, this has not happened. Estimates about the true size of the middle class which can be as large as 264 million or as small as 23 million do not even come close to this projection. Moreover, years of economic mismanagement, faltering growth rates, and the impact of the Covid-19 pandemic mean that the middle class that does exist has taken a battering. India could not have steered more off course. The Pew Research Center estimates that India’s middle class, defined as people who live on USD 10 to USD 20 a day, has shrunk by a third—its strength of 99 million, according to Pew, decreased to 66 million in 2020.4

Figure 1: India’s Small and Shrinking Middle Class Estimated number of people in each income tier in 2020 before and after the global recession, in millions.

However, the 33 million Indians who have been forced out of the middle class account for “60 percent of the global retreat in the number of people in the middle- income tier”.5 Among these ranks are professionals who have lost their employment.

Image in public domain: unsplash.com

Of course, living standards have plummeted around the world as the pandemic repeatedly disrupts economic activity. However, the 33 million Indians who have been forced out of the middle class account for “60 percent of the global retreat in the number of people in the middle-income tier”.5 Among these ranks are professionals who have lost their employment.6 Many may regain lost ground as India’s economic recovery takes hold but it will be an arduous journey. Even before the Covid-19 pandemic, there were serious questions about the true size and influence of the country’s middle class

In 2018, The Economist referred to this as “India’s missing middle”.7 Talk of the size, purchasing power, and growth of the Indian middle class was more hype than reality, as companies with disappointing returns found. Simply, only a small part of the Indian market can match the consumption behavior of its global peers. As The Economist points out, “Even for someone in the top 10 percent of Indian earners, an annual Netflix subscription can cost over a week’s income”.8





The Middle Class: Important to Economic Growth

Consumption is one of the most visible attributes of the middle class and forms the backbone of domestic demand. Globally, middle income households have the largest contribution to aggregate consumption.9 In India, it is unsurprising that ownership of a television, vehicles (perhaps, a scooter), refrigerator, etc., are emblematic of making it to the middle class. Beyond consumption, a robust middle class is desirable for many reasons. For an emerging economy like India, a growing middle class is a good proxy/indicator for economic health and successful policy. If the middle class is growing, it means that the economy is growing, material comfort at the individual and household levels is rising, and there are opportunities for upward mobility. Economic historians have long discussed links between the middle class and economic development.

The middle class was a driving force in the economic development of Western Europe.10 Similarly, “the great English middle class” of the 18th century is cited as one of the reasons England was the first country to industrialize.11 The role of the American middle class in creating demand-side growth in the 1950s’ post-war boom is well-known. Economist William Easterly (2000) finds that countries where a “middle class consensus” exists tend to grow faster.12 According to Easterly, a “higher share of income for the middle class and lower ethnic divisions are empirically associated with higher income and higher growth.” Furthermore, “a middle class consensus is also associated with more education, better health, better infrastructure, better economic policies, less political instability, less civil war and ethnic minorities at risk, more social ‘modernization’, and more democracy”

Globally, the middle class is best recognizable by its ownership of “cash, credentials, and culture”.13 These very characteristics are channels through which the middle class promotes economic growth. With that said, credentials or accumulating human capital through investments in education and health is the most significant way the middle class spurs growth. An analysis of cross- country data by the Asian Development Bank (2011) found that the presence of a strong middle class positively helps economic growth by increasing levels of human capital in the economy.14 Even if India’s middle class is unable to consume Netflix, Starbucks, or take vacations at the same rates as middle class families in the developed world, its place in the cogs of the economy is invaluable.

India’s Middle Class: Slow Growth, Rising Inequality

Over the decades since Independence, the Indian middle class has evolved. In colonial India, the middle class was a thin stratum of people, created by the British, professionals meant to serve as “cultural mediators” between the British rulers and the Indian population at large.15 This class was not necessarily the economic middle. Today, the terms middle class and middle income are generally interchangeable.

So, how large is India’s middle class actually? There is no one definitive figure. Among policymakers and academics, there is little agreement on the parameters to measure the middle class and its size. The Indian middle class can vary depending on whom one asks and what they are looking at—wealth, income, or self-identification. For instance, the Pew Research Center says 66 million people form the middle class while Credit Suisse’s wealth-based report found that only 23.6 million Indian adults qualified as middle class in 2015.16 The Government of India, citing the number of people filing taxes, came up with the figure of 28.7 million in 2011.17 Perceptions differ, however. When surveyed, 50 percent of Indians self- selected as middle class.18 However, there is broad consensus that the Indian middle class is much smaller than imagined. For comparison, China’s middle class is at least 400 million strong.

Some may argue that comparing the Indian middle class with the standards and income of the “Western middle class” may be unfair. For instance, Martin Ravillion (2009), the economist who came up with a dollar-a-day poverty line, argues that people living on USD 2 to USD 13 per day in the developing world could be considered to be members of the middle class.19 However, Christian Meyer and Nancy Birdsall (2012) at the Center for Global Development find that USD 10 per capita per day seems to have emerged as the “global minimum for the middle class”.20 It is hard to imagine someone living right above the USD 2-a-day global poverty line being able to comfortably wear the characteristics of income stability, consumption, and human capital accumulation that we have come to associate with the middle class.

Image in public domain: ByAnnie Spratt, unsplash.com

Pre-pandemic estimates show that China’s middle class rapidly ballooned from 3.1 percent of its population in 2000 to 50.8 percent in 2018, Brazil’s from 30.3 percent to 51.4 percent, and Russia’s from 28.2 percent to 71.5 percent.21 In the same period, India’s middle class grew from 1.2 percent in 2000 to a comparatively paltry 5.7 percent in 2018 (based on Pew estimates and the USD 10 to USD 20-a-day definition).

The truth is that India’s middle class has not grown at rates comparable to its global peers. Pre-pandemic estimates show that China’s middle class rapidly ballooned from 3.1 percent of its population in 2000 to 50.8 percent in 2018, Brazil’s from 30.3 percent to 51.4 percent, and Russia’s from 28.2 percent to 71.5 percent.21 In the same period, India’s middle class grew from 1.2 percent in 2000 to a comparatively paltry 5.7 percent in 2018 (based on Pew estimates and the USD 10 to USD 20-a-day definition). Is it any wonder then that publications such as The Economist argue that India “has a hole where its middle class should be”?

Another reason to bemoan this “missing middle” is that it is indicative of the existing and worsening inequality in the country. As inequality has deepened, levels of intergenerational socio-economic upward mobility have remained low in India.22 Growth in average education levels and the average income has not been sufficient to help along upward mobility.

Table 1: Change in the Size of the Middle Class in BRICS Countries (2000-2018), Based on the Pew Research Center’s Estimates

For instance, Asher et al. (2021) find that in Gujarat there has been “high economic growth but relatively low mobility”.23 A similar pattern emerges in national-level data. While India’s per capita income has steadily grown (pre-pandemic), this prosperity has not been evenly distributed. Over the past three decades, the income of the top 1 percent of Indians has doubled while the share of income of the middle 40 percent has shrunk. Most Indians make far lesser than the per capita income of USD 1,900 (2020 estimates).24 Inequality has only become sharper because of Covid-19. As millions of stories of distressed businesses, crushed middle class aspirations, and unemployment emerged, India simultaneously added one new billionaire every week in 2020.25

Saving India’s Middle Class

As one report points out, “what is commonly referred to as the ‘middle class’ in India has nothing to do with Middle India” and the middle class is actually the upper or upper-middle class.26 This path is clearly unsustainable and detrimental to India’s future prospects. India deserves a great middle class populated by professionals and others who can aspire to better living standards for their children and within their own lifetimes. The objective of public policy then, on a broad level, is fairly intuitive— fostering an economic environment where this middle India can become middle income. Much of this has to do with reducing inequalities of income, improving employment opportunities, increasing access to quality healthcare and education, reducing gender inequality, etc. The provision of public goods and adequate opportunities for mobility should be the focus, accompanied by an understanding of the needs and priorities of the middle class.

Table 2: Growing Inequality: India’s Middle 40 Percent’s Share of Pre-Tax Income Has Been Shrinking Despite the Growth in Average Per Capita Income

Over the past three decades, the income of the top 1 percent of Indians has doubled while the share of income of the middle 40 percent has shrunk. Most Indians make far lesser than the per capita income of USD 1,900 (2020 estimates). 24 Inequality has only become sharper because of Covid-19. As millions of stories of distressed businesses, crushed middle class aspirations, and unemployment emerged, India simultaneoulsy added a new billiniore every week

The middle class saves and consumes but, above all, distinctly values the accumulation of human capital which in turn creates a foundation for economic growth. It is unsurprising that core items such as health and education make up the bulk of middle-class spending.27 Ensuring low costs and better quality of these core goods will help nurture the middle class and its most desirable attributes from a growth perspective. Given that local and global labour market demands are rapidly evolving, addressing issues like skill gaps and reskilling will also be critical to keeping middle class professionals competitive/nimble and able to adapt to a changing labour market without falling out of the middle class altogether.

There can be no middle class without adequate jobs. “Nothing seems more middle class than the fact of having a steady well-paying job,” write Abhijeet Banerjee and Esther Duflo.28 They go on to say that members of the middle class generally prefer “the right salaried job” over entrepreneurship. Unfortunately, India has not been able to create jobs at the pace it needs to. What we have are young Indians with aspirations but no avenues to fulfill them. According to the Centre for Monitoring Indian Economy (CMIE), in March 2021, 40 million Indians were “jobless but willing to work”.29 Creating job opportunities will be critical in helping young professionals move into the middle class and remain there. The supply-side of this involves improving skill sets and reducing inequalities in access and quality of education, as discussed above. On the demand side, the quality and stability of jobs matter.

The middle class saves and consumes but, above all, distinctly values the accumulation of human capital which in turn creates a foundation for economic growth. It is unsurprising that core items such as health and education make up the bulk of middle-class spending. 27 Ensuring low costs and better quality of these core goods will help nurture the middle class and its most desirable attributes from a growth perspective.

When thinking about avenues for economic participation, policymakers must focus especially on women. The OECD suggests that improving female labor force participation and earnings can increase disposable incomes for the middle class across the board.30 India has very poor rates of female labor force participation—one of the lowest in the world—which presents a large, untapped economic opportunity. McKinsey estimates that India could add USD 770 billion to its GDP if gender parity is achieved.31

Policies to make commutes safer such as better street lighting and deputing more female cops, for example, can go a long way in getting women into the workforce— particularly urban middle class women. Good quality maternal healthcare and maternity leave are also important to boosting women’s economic participation and general health outcomes.

© R.Sinha

The OECD suggests that improving female labor force participation and earnings can increase disposable incomes for the middle class across the board. India has very poor rates of female labor force participation—one of the lowest in the world— which presents a large, untapped economic opportunity. McKinsey estimates that India could add USD 770 billion to its GDP if gender parity is achieved.

The Covid-19 crisis has cost India a large chunk of its middle class. One must ask—could Indian policymakers have done more to reduce the scale of this backsliding? Perhaps the availability of unemployment benefits or income support to smooth consumption for the middle class could have reduced the number of families forced out of the middle class. In the United States, stimulus payments and tax breaks actually helped middle class families see their incomes rise by 5 percent.32 Such large payouts may be difficult for India, but contingency plans that include income support for vulnerable middle income households must be seriously considered for future crises.

There is much more that can be done to grow the middle class. This includes ensuring that low and medium earners receive fair wages, that affordable housing is available, that quality education and health are accessible, etc.33 The focus of such policies must not remain confined to towns and cities, however. While the most ubiquitous images of middle class life usually have an urban setting in television,” advertisements, and our imaginations, a significant number of middle class households are based in rural India too.34 Ultimately, any and all policy directions need to be inclusive. This may be the only way India can undo the inequalities that are stifling the growth of its middle class.

There can be no middle class without adequate jobs. “Nothing seems more middle class than the fact of having a steady well-paying job,” write Abhijeet Banerjee and Esther Duflo. They go on to say that members of the middle class generally prefer “the right salaried job” over entrepreneurship

(Salman Anees Soz is an economic development consultant to international institutions, author and commentator. He was formerly with the World Bank, and is a recipient of the World Bank President’s Award for Excellence. He has an MBA from Yale University, an MA in Economics from Northeastern University, and a BA (Hons) in Economics from St. Stephen’s College.)

Endnotes

1. Singh, Kara Deep and Hari Kumar. ‘Covid-19 pushes India’s middle class toward poverty.’ New York Times. April 16, 2021. https://www.nytimes.com/2021/04/16/ business/economy/india-covid19-middle-class.html

2. Kapur, Devesh, Sircar, Nilanjan, and Vaishnav, Milan (2017). ‘The importance of being middle class in India.’ From The New Middle Class: Data and Perceptions. https://vaishnavmilan.files.wordpress.com/2017/11/being-middle-class-in-india-proofs.pdf.

3. Farrell, Diana and Beinhocker, Eric (2007). ‘Next big spenders: India’s middle class.’ https://www.mckinsey.com/mgi/overview/in-the-news/next-big-spenders- indian-middle-class

4. Kochhar, Rakesh (2021). ‘In the pandemic, India’s middle class shrinks and poverty spreads while China sees smaller changes.’ https://www. pewresearch.org/fact-tank/2021/03/18/in-the-pandemic-indias-middle-class-shrinks-and-poverty-spreads-while-china-sees-smaller-changes/

5. Kochhar, Rakesh (2021). ‘In the pandemic, India’s middle class shrinks and poverty spreads while China sees smaller changes.’ https://www.pewresearch.org/fact-tank/2021/03/18/in-the-pandemic-indias-middle-class-shrinks-and-poverty-spreads-while-china-sees-smaller-changes/

6. ‘Unemployment crisis: Over 60 lakh white collar professional jobs lost during May-August.’ India Today, September 18, 2020. https://www.indiatoday.in/business/story/unemployment-crisis-deepens-over-60-lakh-white-collar-professionals-lost-jobs-during-may-august-1722971-2020-09-18

7. The Economist (2018). ‘India has a hole where its middle class should be.’ https://www.economist.com/leaders/2018/01/13/india-has-a-hole-where-its-middle-class-should-be

8. The Economist (2018). ‘The elephant in the room: India’s missing middle class.’ https://www.economist.com/briefing/2018/01/11/indias-missing-middle-class

9. OECD (2019). ‘Chapter 4. The rising cost of the middle-class lifestyle.’ From Under Pressure: The Squeezed Middle Class. https://www.oecd-ilibrary.org/sites/e2352f43-en/index.html?itemId=/content/component/e2352f43-en

10. Easterly, William (2000). The Middle Class Consensus and Economic Development. World Bank. https://openknowledge.worldbank.org/bitstream/handle/10986/18849/multi_page.pdf?sequence=1&isAllowed=y

11. Easterly, William (2000). The Middle Class Consensus and Economic Development. World Bank. https://openknowledge.worldbank.org/bitstream/handle/10986/18849/multi_page.pdf?sequence=1&isAllowed=y

12. Easterly, William (2000). The Middle Class Consensus and Economic Development. World Bank. https://openknowledge.worldbank.org/bitstream/handle/10986/18849/multi_page.pdf?sequence=1&isAllowed=y

13. Reeves, Richard V., Guyot, Katherine, and Krause, Eleanor (2018). ‘Defining the middle class: Cash, crede ntials, or culture?’ Brookings. https://www.brookings.edu/research/defining-the-middle-class-cash-credentials-or-culture/

14. Chun, Natalie, Hasan, Rana, and Ulubasoglu, Mehmet (2011). ‘The role of the middle class in economic development: What do cross-country data show?’ ADB Economics Working Paper Series, Asian Development Bank. https://www.adb.org/sites/default/files/publication/28751/economics-wp245.pdf

15. The Wire (April 7, 2021). ‘Does the Indian middle class really exist? https://www.youtube.com/watch?v=k_hrgYbpPuw

16. Salve, Prachi (2015). ‘Not 264 million, middle class is 24 million: Report.’ The Wire. https://thewire.in/economy/not-264-million-middle-class-is-24-million-report

17. Kapur, Devesh, Sircar, Nilanjan, and Vaishnav, Milan (2017). ‘The importance of being middle class in India.’ From The New Middle Class: Data and Perceptions. https://vaishnavmilan.files.wordpress.com/2017/11/being-middle-class-in-india-proofs.pdf.

18. Kapur, Devesh, Sircar, Nilanjan, and Vaishnav, Milan (2017). ‘The importance of being middle class in India.’ From The New Middle Class: Data and Perceptions. https://vaishnavmilan.files.wordpress.com/2017/11/being-middle-class-in-india-proofs.pdf

19. Ravallion, Martin (2009). “The developing world’s bulging (but vulnerable) ‘middle class’.” World Bank Policy Research Working Paper No. 4816, Available at SSRN: https://ssrn.com/abstract=1327285

20. Meyer, Christian and Birdsall, Nancy (2012). ‘New estimates of India’s middle class.’ Center for Global Development. https://www.cgdev.org/sites/default/files/ archive/doc/2013_MiddleClassIndia_TechnicalNote_CGDNote.pdf

21. ‘How well-off Is China’s middle class.’ China Power. Center for Strategic and International Studies. https://chinapower.csis.org/china-middle-class/

22. Ghatak, Maitreesh (2021). ‘India’s inequality problem.’ The India Forum. https://www.theindiaforum.in/article/does-india-have-inequality-problem

23. Asher, Sam, Novosad, Paul, and Rafkin, Charlie (2021). Intergenerational Mobility in India: New Methods and Estimates Across Time, Space, and Communities. http:// paulnovosad.com/pdf/anr-india-mobility.pdf

24. World Bank (2021). World Development Indicators: GDP Per Capita (Current US$) – India. https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=IN

25. Yuthika Bhargava (2021). ‘In 2020, world added 3 billionaires every two days, India added one every week.’ The Hindu, March 02. https://www.thehindu.com/news/national/ india-adds-40-billionaires-in-pandemic-year-adani-ambani-see-rise-in-wealth-report/article33970268.ece

26. Hedrick-Wong, Yuva. From Middle India to the Middle Class of India: Inclusive Growth as the Path to Success. https://www.mastercardcenter.org/content/dam/mc-cig/uploads/ From-Middle-India-to-Middle-Class-of-India.pdf

27. OECD (2019). ‘Chapter 4. The rising cost of the middle-class lifestyle.’ From Under Pressure: The Squeezed Middle Class. https://www.oecd-ilibrary.org/sites/e2352f43-en/index. html?itemId=/content/component/e2352f43-en

28. Banerjee, Abhijit V. and Duflo, Esther (2008). ‘What is middle class about the middle classes around the world?’ https://economics.mit.edu/files/10881

29. Rajvanshi, Astha (July 23, 2021). ‘India’s middle class sees gains wiped out or hang by a thread.’ Al Jazeera. https://www.aljazeera.com/economy/2021/7/23/indias-middle-class- sees-gains-wiped-out-or-hang-by-a-thread

30. OECD (2019). ‘Chapter 5: Policies for a prosperous middle class.’ From Under Pressure: The Squeezed Middle Class. https://www.oecd-ilibrary.org/sites/8e318c69- en/index.html?itemId=/content/component/8e318c69-en

31. Woetzel, Jonathan et al. (2018). The Power of Parity: Advancing Women’s Equality in Asia Pacific. McKinsey Global Institute. https://www.mckinsey.com/featured- insights/gender-equality/the-power-of-parity-advancing-womens-equality-in-asia-pacific

32. Rappeport, Allen (2021). ‘New stimulus package brings big benefits to the middle class.’ The New York Times, March 10. https://www.nytimes.com/2021/03/10/us/ politics/biden-stimulus-middle-class-benefits.html

33. OECD (2019). ‘Chapter 5: Policies for a prosperous middle class.’ From Under Pressure: The Squeezed Middle Class. https://www.oecd-ilibrary.org/sites/8e318c69- en/index.html?itemId=/content/component/8e318c69-en

34. Ramanathan, Swati and Ramanathan, Ramesh (2019). ‘Many layers within India’s middle class.’ Hindustan Times, April 16. https://www.hindustantimes.com/india-

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