India's economic narrative is increasingly marked by a divergence between overall growth and the prosperity of its middle class, leading to a situation where a significant portion of the population is falling off the global middle-class map. Several factors contribute to this concerning trend, painting a complex picture of rising inequality and economic vulnerability.
One of the primary drivers behind this shift is the uneven distribution of wealth and income. Recent data indicates that income inequality in India remains among the highest globally. The top 10% of earners capture a substantial 58% of the national income, while the bottom 50% receive a mere 15%. This disparity is further amplified by wealth inequality, with the richest 10% controlling approximately 65% of the total wealth, and the top 1% holding about 40%. Such concentration of wealth at the top leaves a smaller share for the middle and lower classes, hindering their ability to climb the economic ladder.
The COVID-19 pandemic exacerbated these existing inequalities, delivering a significant blow to India's middle class. A study by the Pew Research Center estimated that India's middle class shrank by 32 million in 2020, accounting for 60% of the global decline in the middle-income tier. Simultaneously, the number of people living in poverty (earning $2 or less a day) increased by an estimated 75 million. This setback effectively reversed several years of progress in poverty reduction and middle-class expansion. The pandemic led to job losses, reduced incomes, and business closures, particularly affecting those in urban and semi-urban areas who rely on salaried employment. Many were forced to take on debt or move into the informal sector, further destabilizing their financial situation.
Another challenge facing the Indian middle class is the issue of stagnant wages and rising costs of living. Income-tax data suggests that middle-class incomes have remained relatively stagnant for the past decade. When adjusted for inflation, the real income has declined, making it difficult for families to maintain their living standards. The rising costs of essential goods and services, such as food, healthcare, and education, further erode disposable incomes and savings. This squeeze on finances forces many middle-class families to take on more debt to meet their needs and aspirations. Reserve Bank of India data indicated that household debt has been rising, with non-housing liabilities growing sharply.
Furthermore, automation and technological advancements pose a threat to middle-class jobs. As machines and AI-driven systems replace traditional roles in various sectors, many middle-class workers face the risk of job displacement. The manufacturing sector, which is crucial for providing scalable employment, has struggled to grow significantly, while the service sector, although dominant in GDP contribution, has not generated enough jobs to absorb the growing workforce.
Despite these challenges, it's important to note that poverty rates in India have declined significantly in recent years. The World Bank reported a sharp fall in extreme poverty, with the percentage of people living below the international poverty line dropping to a very low percentage in 2022-23. Government welfare programs, such as food and cash transfers, have played a crucial role in this reduction. However, even with these gains in poverty reduction, the structural issues of inequality, stagnant wages, and job insecurity continue to undermine the progress and stability of the middle class.
In conclusion, the shrinking of India's middle class is a multifaceted problem rooted in income inequality, the economic impact of the COVID-19 pandemic, stagnant wage growth, rising living costs, and the threat of automation. While poverty reduction efforts have shown success, addressing the challenges faced by the middle class requires a more comprehensive approach that promotes inclusive growth, reduces inequality, invests in human capital, and creates stable, well-paying jobs. Otherwise, India risks further marginalizing a crucial segment of its population and hindering its long-term economic development.
