Estimates of India’s middle class are as many as the number of people engaged in this quest. Perhaps this is because of a lack of clarity on what characteristics the ‘middle class’ must have to qualify for the label
A FAVOURITE pastime ofIndia’s business analysts and media over the years has been to estimate the size of India’s middle class — a critical indicator of the current and future health of India’s household consumption, and hence India’s economy.
Estimates of India’s middle class are as many as the number of people engaged in this quest. Perhaps this is because of lack of clarity on what characteristics the middle class must have in order to qualify for the label, despite all the literature on the subject from scholars around the world. The result is several groupings of heterogeneous households all labelled “middle class”, based on other-country benchmarks or subjective judgments with very wide income ranges or yardsticks of consumption of consumer durables and amenities, or a magic number of income where consumption is supposed to ‘take off’, based on developed world cost structures (ask Jio and HUL if they believe this).
In reality, India’s genuine middle class is less than half of the 400 to 500 million number that floats around. Seeing the large economic impact such a small genuine middle class has achieved, instead of calling victory, it is time to obsess over how to significantly expand it to help India turbo charge the economy to achieve its fullest potential.
In this two-part article we examine, in part one, what characteristics a genuine middle class must have and why, and basis that, estimate the size of India’s genuine middle class. In Part 2 we examine what needs to be done to build a large genuine middle class.
The economic concept of “middle class”, on which abundant literature exists, is that a genuine middle class should provide a certain quantum of consumption that is stable and resilient because of how the income to consume is generated (the nature of occupation); and should have enough surpluses after routine expenditure to help them weather economic downturns and be able to bounce back without having to contract their consumption too much for too long. This is where many of the so-called middle class households in India do not qualify.
Such stable and resilient demand will give investors confidence to invest which, in turn, creates a virtuous cycle of creating jobs and further strengthens the middle class. Surplus income that is reasonable, stable and resilient also contributes to the savings health of the economy.
For a middle class to be a long-term, high commitment investment thesis for businesses, in addition to the stability and resilience of its consumption, there needs to be a strong foundation that enables continuous improvement in income levels, leading to more and better quality consumption as well. A genuine middle class household is one where the consumption behaviour steadily shifts upwards from price sensitivity to benefit sensitivity. This, in turn, stimulates another virtuous cycle of powerful, diverse and better quality supply responses.
The charts show that when these criteria are applied, India’s genuine middle class is much smaller than most popular estimates. It sits in the richest 10 to 20 per cent ofIndian households and not in the middle of the income spectrum. D10 and D9, the richest top two deciles of households, qualify on income criteria. However their occupation profile is worrisome. Only 60% of D10 and less than half of D9 have regular salaries. In D9, a large portion of these are privately employed and, given the known fact of miniscule formal employment, are most likely to be informally employed.
Income dependence on small agricultural land and informal non agricultural occupations is 42% for D9 and about a quarter ofD10, making them inherently unstable. Education demographics of Chief Wage Earners is not conducive to upward mobility into value added high skilled jobs — just 20% ofD9 and 40% ofD10 have college degrees or technical diplomas. Realistically this reduces the size of the genuine, fully formed middle class even further to 40 to 50 million households.
We conclude part 1 by saying that India is still quite some way off from having a genuine middle class that can power its economy. In an earlier paper, India’s Future lies in building a genuine middle class, we have pointed out that Middle India, the middle 60% of households in the middle of the income spectrum, should have been the genuine middle class ofIndia and has been neglected, and that India’s future lies in building a genuine middle class several times larger than it is now. Imagine the impact on the economy if that number was three times what it is now.