Who Shrunk India’s Middle Class?

Slowdown in consumption

Significantly, the government has finally given up its ostrich-like attitude and is now admitting that there is indeed a crisis of declining consumption. The latest monthly assessment from the Ministry of Finance shows that consumer demand is declining. It noted the sharp slowdown in FMCG sales and said there was a 2.3 percent contraction in auto sales. The decline in home sales and launches in the second quarter is also mentioned.

Most of these FMCG, car companies and real estate agents who sell houses have based their business plans on this ephemeral ‘middle class’, defined as people with significant disposable income and a huge appetite to spend money on the good things in life. Accounting and management firms, with the help of questionable ‘research’, first reported rosy figures in the early, heady days of liberalization. The magic figure touted at the time was a middle class of 450 million people that would boost growth and consumption in India.

When the dust settled, everyone realized that the middle class of 450 million people was wishful thinking. Twenty years later, the more realistic figure is about a fifth of the earlier estimate. The US-based Pew Research Center estimated the pre-Covid strength of India’s middle class – defined as those earning between $10 and $20 per day or between Rs 25,000 and Rs 50,000 per month – at around 99 million.

The vulnerability of middle class income and consumption can be seen from Pew Research data, which shows that around a third of this segment fell out of the ‘middle class’ during the Covid-19 freeze, making it number actually dropped to about 66 million. The numbers that dropped have probably recovered and the ‘middle class’ is now over 100 million strong.

But estimates continue to vary widely. Ridham Desai, MD of Morgan Stanley says: “…one hundred million new households, or 450 million people, which is larger than the population of the US and all of Europe, will become a middle class over the next decade.”