The cold reality about India's middle class (2024)

The company, which is also a beneficiary of India’s production-linked incentive (PLI) scheme, sees India as a major export hub and sees a tripling of products manufactured in India and exported elsewhere, by 2025.

In comparing the potential of the Indian market to that of China, due to the potential inherent in the spending power of the middle class, Togawa was echoing what many, equally optimistic chief executives have said before. There is certainly potential in the Indian market to grow, with Indian AC ownership in the mid-single digits and with average summer temperatures set to rise in the long term due to climate change.

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But it has been apparent for some time that a bet on the rising size and spending potential of the Indian middle class is a risky bet, not just for white goods manufacturers like Daikin, but for a range of other companies, such as those in e-commerce, or more recently, online food or grocery delivery. While there has been scepticism for some time on the spending potential of the middle class, it is the next couple of years or so that will prove to be decisive in the fortunes of many such companies.

Period of Reckoning

Why is this? Firstly, 2022 is the first full year after the covid-19 crisis, when the economy and society returned to a normality of sorts after the devastation of 2020-21. But even as the economy was in the process of recovering, the Ukraine crisis caused global commodity prices, and consequently inflation, to hit consumer budgets.

NielsenIQ, the consumer behaviour analytics company, found that volume growth in India’s FMCG (fast-moving consumer goods) sector fell by 1.5 percentage points in 2022, with companies in the sector showing growth by hiking prices. With global oil prices, and therefore inflation, expected to be a bit more stable in 2023, consumer spending, companies hope, will pick up slowly but steadily over the coming two years. Barring another crisis or shock to the economy like covid-19, that is.

The second reason is related directly to the funding and business models of the companies concerned. The bump in global inflation has led to central banks around the world to begin the biggest round of rate hikes in more than a decade, causing interest rates, and therefore funding costs, for companies to spike sharply.

Internet companies have raised ample funds over a decade due to low interest rates, and there is desperation on the part of investors for some sort of real return on investments. As a sweetener, investors were more than willing to look the other way as many such companies, in customer acquisition mode, ignored profitability. That era is now decisively over, for all companies in the sector, from Facebook and Google to a small startup in its first funding round.

But this means that the generation of unicorns and decacorns which came of age in the 2010s, a decade awash with cheap money, are going to face up to the same challenge that a generation of companies that came before them faced. Can they make money in the Indian market? And on a scale that justifies their valuations?

Wealth or Income?

It’s always been difficult to define an income level that is appropriate to a middle class family, especially given that location is crucial. An income appropriate to a middle class lifestyle in Mumbai, for instance, would be very different than one that would be able to sustain a similar family in a tier-II city, simply because of the cost of housing. So, it’s often easier to describe ownership in terms of durable goods that most would recognize as markers of a middle class lifestyle.

On this metric alone, the data seems encouraging. Chart 1 compares data on consumer durable ownership captured by the Census in 2011, with the data collected by the National Family Health Survey in 2019-20. Mobile phone penetration, for instance, is at near-saturation levels at 93% (though smartphone ownership is likely much lower). The proportion of households owning a motorized two-wheeler is around 50%, more than double the share a decade earlier. Ownership of television sets is around 20 percentage points higher than it was a decade earlier.

But even here, there are some signs that point the other way. Ownership of motorized four-wheelers has risen by just 2.5 percentage points and is still well in single digits. Households owning either a two- or four-wheeler, and also a mobile, TV and computer, rose from about 5% to 8%.

But there are other ways to approach this problem of definition. Instead of ownership of durables, or consumption or income, there is also wealth. The now-defunct Credit Suisse released a global wealth report every year which compiled statistics of wealth ownership across the globe.

In 2015, the report focused on the global middle class and attempted to estimate its size. It admits: “The middle class category is not easy to define. At one time the label was usually attached to households whose head was a professional or a manager, or who worked in a skilled white collar or blue-collar job. More recently, it has become common to define the middle class in terms of a range of household income which offers a comfortable lifestyle, but not an overly generous one; in other words a range which excludes the poor and those vulnerable to poverty at the bottom end, but also those at the top with the highest incomes."

Ultimately, the authors attempted to estimate the middle class using a wealth, rather than an income criterion, a metric which better captures the element of psychological and mental safety that savings provides.

They say: “This has many attractions: the values and aspirations of the middle class have always been linked to ownership of property... Furthermore, access to modest amounts of assets allows households to tide themselves over when misfortune strikes; in other words, it ensures less vulnerability to spells of poverty. An income-based definition of the middle class misses these elements of freedom and security. It suggests, for example, that a spell of unemployment can cause middle class status to evaporate. A wealth-based definition, on the other hand, conforms better to the widespread view that middle class membership is resilient to temporary setbacks."

The ‘Middle’ Class

For 2015, based on such criterion and using the US as a benchmark and adjusting for purchasing power, the cutoff for a middle class income was $13,700, or around ₹9 lakh in wealth (at the then prevalent exchange rate of ₹65 to the dollar). This is equivalent to slightly less than two years of earnings for a person on a salary of ₹40,000 per month. On this criteria, the number of middle class adults in India was estimated at 24 million—just around 3% of the population. The number of adults in the Indian ‘middle class’ (by this definition) between 2000 and 2015 rose by around 6.8 million.

The so-called median wealth per adult, estimated by hypothetically ranking all adults from poorest to the wealthiest, and taking the wealth of the person in the middle, was much lower than the middle class cutoff, at around $2,285, and rising eventually to $3,457 by 2021. In comparison the average wealth per adult is much higher than this, and closer to the ‘middle class’ cut off. In 2015, it was $10,800, rising to $14,804 by 2021 (see Chart 2).

Thus, a ‘middle class’ person in India is not really middle class in that sense – they are pretty much in the top 10%, if not 5% of the Indian wealth distribution. And this is really the problem. Even today, 30 years after economic reforms, the slice of the population that forms a viable market for most companies, is really within the top 10% of the population—in fact, far less than that.

There is other data as well that lines up with this. In fact, official government data is more pessimistic. A monthly income of ₹40,000 corresponds to an annual income of ₹5 lakh. According to tax return data available from the government, the total number of returns filed with the income tax department, declaring total incomes of between ₹3.5 lakh and ₹5.5 lakh per annum rose from 7.13 million in 2013-14 to 15.96 million 2017-18. While the actual number of people earning in this range (but not declaring their income) is almost certainly higher, it seems highly unlikely that it is big enough to change the picture.

The Years Ahead

Thus, the cold reality is that the economy simply has not grown fast enough and in a manner that is equitable enough, to be profitable for companies whose main consumer is the ‘middle class’. It is the top 1% of wealth distribution in the country that has done really well, accounting for 40% of all wealth in 2021, up from 33% in 2000.

But can this be fixed in the future? What does the data tell us about current rates of employment?

While employment rates have recovered in the post-covid period, and unemployment rates have fallen, there is a structural aspect to employment that is a real problem. Simply put, the economy is not generating jobs fast enough to absorb new entrants into the workforce. Unemployment rates among the youth have soared and are far higher than the rest of the population over the last decade or so.

In 2011-12, the National Sample Survey’s employment survey found that the unemployment rate for men and women aged 15-29 years in urban India was 8% and 13%, respectively. By 2021-22, that periodic labour force survey (the successor to the NSS employment surveys) found that those rates had soared to 15.8% for urban men and 21.6% for urban women. Even before the labour market disruptions caused by covid, those unemployment rates were high. As of 2018-19, unemployment rates in the 15-29 years age band were 18.7% for men and 25.7% for women.

And this is really the second part of the problem. While the middle class, as it exists, is tiny and far below the expectations of most marketers, the potential pool of new entrants to the middle class—those entering the labour force for the first time—is shrinking as well. Schemes like PLI, intended to onshore manufacturing jobs, will have their work cut out for them to reverse the trend of the rising unemployment.

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