Ashraf Engineer
February 15, 2025
EPISODE TRANSCRIPT
Hello and welcome to All Indians Matter. I am Ashraf Engineer
In the run-up to the Union Budget, the dominant topic of discussion was what it would do for the Indian middle-class, which is besieged by the soaring cost of living and the lack of jobs. While Finance Minister Nirmala Sitharaman handed out generous tax cuts, there wasn’t much confidence that that alone would do the trick. Conspicuous by their absence were comprehensive measures to lower the cost of essentials, fuel, power, education and healthcare.
Such is the distress that the term ‘shrinking middle-class’ is now common. And there are several indicators that it is based in fact. Consumption is down, for example, and the fast-moving consumer goods industry has acknowledged it. Last year, two-wheeler sales fell and car inventory rose too.
There is no doubt that the once-thriving middle-class is now struggling with economic challenges that have significantly impacted its consumption patterns.
SIGNATURE TUNE
Last October, Chairman and Managing Director of Nestle India confirmed what macroeconomic data had been indicating for a while — income and consumption are stagnating for the middle-class. He minced no words while speaking about a “shrinking middle-class” while discussing a sharp downturn in urban sales growth for Nestle. As he released his company’s quarterly growth figures, he said: “There used to be a middle segment – the middle-class – where most of us FMCG companies used to operate in. That seems to be shrinking.” He added that the slowdown had been persisting for several quarters, which was unusual.
Another FMCG giant, Hindustan Unilever, echoed Narayanan while reporting subdued growth and lower consumption in urban markets. Its CEO Rohit Jawa said: “Urban growth has trended downward, especially in larger cities.”
The urban middle-class drives two-thirds of FMCG sales and private consumption accounts for 60% of India’s GDP. The urban middle-class has been the engine of this consumption but it is now grappling with stagnating real wages, mounting debt, high interest rates and surging inflation. Some reports say real wage growth in India has been negligible, merely 0.01%, over the past five years. This has wiped out purchasing power and households are cutting back on discretionary spending.
Incidentally, it’s not just FMCG majors; even the CEO of Asian Paints had as far back as May 2024 expressed scepticism about GDP numbers. He felt they did not correlate with sectoral performance on the ground, although the very next day he recanted his comments.
One of the major problems has been food inflation. I had said in an earlier episode that it makes up just under half of the overall Consumer Price Index basket. In November 2024, it eased to 9.04% from 10.87% in October. However, it remains too high and is way over the 4% tolerance limit set by the Reserve Bank of India. Average food inflation this fiscal has risen to 8.4% vs 7.5% in the last fiscal – this is crippling household budgets.
A report by Marcellus Investment Managers late last year said the slowdown can be attributed to three primary factors: technological disruption, an economic downturn and deteriorating household finances.
It is no secret that routine, repetitive jobs that kept the middle-class employed are fast being replaced by technology.
As for household budgets, the RBI’s interventions don’t seem to be working. A State Bank of India research report last year said that the middle-class has shifted from an annual income range of Rs 1.5-5 lakh to Rs 2.5-10 lakh over the past decade. However, the average inflation during this period was 5.5%. This means a person earning Rs 5 lakh in 2013-14 had to earn Rs 8.6 lakh in 2023-24 to maintain their lifestyle. As we’ve discussed, that hasn’t happened.
This has been noticed and it’s been a while now since corporate analysts have been talking about it. Supporters of the government have tried to argue that the Indian middle-class is getting prosperous and one indicator is that it is moving from buying two-wheelers directly to buying SUVs, bypassing entry-level passenger cars. This is nonsense. Even Maruti Chairman RC Bhargava has rubbished the claim. SUV sales are higher because the rich are getting richer and so they are buying more of them. The middle-class is struggling and so we are recording a K-shaped consumption pattern, just like we saw with growth after COVID-19.
What is a K-shaped recovery? It’s a way of describing how an economy bounces back from a downturn. Imagine the letter ‘K’. One line goes up, another goes down. In a K-shaped recovery, some groups – represented by the line going upwards – prosper enormously while others – represented by the line going downwards – struggle. In India, the ones prospering are the wealthy, while the middle and lower classes are on the decline. In a K-shaped recovery, the economy as a whole seems to be improving but very few actually benefit from it. This has been confirmed by studies that show that inequality today is worse than it was during the British Raj.
In a recent series, I had described how economic power is accumulating in the hands of a very few. This has many repercussions, but among them is the contraction of competition. In a market system, competition is the cure and it leads to job creation. Tax cuts might cause some euphoria but, from a long-term perspective, they’re a band-aid not the cure.
Instead, what we have is corporate earnings as a whole in Q2 of FY25 recording their steepest slump in two decades, other than during crises like the 2008 global financial crash. While such downturns are common in free-market economies, their impact on the middle-class is disproportionately severe.
As a result, household debt is rising. RBI data shows that net household savings as a percentage of GDP are at their lowest level in nearly half a century. Unsecured loans are mounting, which pushes net savings into the red
Even a Finance Ministry review last year acknowledged that consumer demand was softening. It confirmed the sharp slowdown in FMCG sales and a 2.3% contraction in automobile sales.
Let’s go back in time a bit. As liberalisation began to weave its magic, FMCG, automobile and real estate firms banked on the middle-class, which had discovered an appetite for the good things in life. It was estimated at one stage that the middle-class would grow to 450-million strong and that consumption was assured for the foreseeable future.
The dust has settled and today a realistic estimate is one-fifth of the earlier one. The US-based Pew Research Centre projected pre-COVID middle-class numbers at 99 million. It defined the middle-class as those earning between $10-$20 a day or Rs 25,000-Rs 50,000 a month.
Here’s how fragile that income is: Pew Research data said about one-third of this segment dropped out of the middle-class during the COVID lockdown, effectively reducing it to 66 million. Perhaps they have returned and maybe the middle-class is 100-million strong. But it’s still a far cry from 450 million.
The government continues to point to the growth numbers – which too are falling, by the way. However, we know that wage and consumption stagnation is a reality. So, why is GDP growth not translating into higher, broad-based consumption? After all, consumption growth generally accounts for half of GDP growth. Many economists believe that the only answer to this contradiction is that GDP growth is being exaggerated.
Let’s compare ourselves to China. Its middle-class has grown much faster than India’s. One data point is telling: the tax-to-GDP ratio in China went from roughly 14% in 2000 to 23% in 2020. In India, it remained in the range of 15% to 18% during the same period. This is another indicator that India’s middle-class is not growing at pace.
The government’s answer has been to pump-prime the economy through public spending, but fiscal constraints have limited its capacity. Central Government capital expenditure during April to October 2024 was 15% lower than the previous year. The states, meanwhile, have also scaled back infrastructure investment. The tax cuts in the Budget were an attempt to stimulate consumption another way.
The RBI, on its part, has responded to inflation with a tight monetary policy but that has inadvertently limited credit growth and dampened consumer sentiment. Adding to the pressures are external challenges, such as rising oil prices, supply chain disruptions, a plummeting rupee and the threat of a global trade war sparked by US President Donald Trump.
However, every crisis is an opportunity for course correction.
The first priority must be the creation of high-quality jobs in manufacturing and technology. Wage stagnation needs targeted interventions, such as upskilling and labour reforms. There needs to be solid government support for small businesses. Again, this has been attempted through wider access to credit in the Budget but that was tried earlier too and didn’t work. Tax relief is another option, although not the overall solution, which the government has exercised. India also needs affordable urban housing to reignite consumption and investment.
In percentage terms, India is among the fastest-growing economies but that comes off a smaller base and the benefits of the growth are uneven, as I’ve pointed out before. This indicates a crack in the foundation. The urban middle-class needs help and a failure to provide it will prolong muted growth and undermine long-term growth potential.
Unless the focus shifts from temporary fixes to structural reforms, the middle-class will continue to struggle and then shrink. In such a situation, there is no chance of returning to high or sustainable growth.
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at editor@allindiansmatter.in. Catch you again soon.
