What Does it Mean to be Middle Class in India?
The Documented Middle Class: ~2.6% of our population.
Today is 14th Feb, and here is my work for this day!
"Wherever there is number, there is beauty." -- Proclus [5th-century Greek philosopher]
Mr. Wilkins Micawber is one of the most memorable characters in Charles Dickens' David Copperfield. He is constantly plagued by financial woes, terrible with money, always borrowing, and frequently facing the threat of debtors' prison. Mr. Micawber's unwavering belief that "something will turn up" is infectious. It's a testament to the human spirit's resilience.
Like Mr. Micawber, we must believe that even when the coffers are empty, the wellspring of opportunity has not run dry.
“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”
― Charles Dickens, David Copperfield
(income £20, expenditure £19 19s 6d) vs (income £20, expenditure £20 0s 6d)
He perfectly illustrates a fundamental principle of personal finance: It's not how much you earn, but how much you spend (relative to your income) that determines your financial well-being.
This advice touches upon themes of consumption, savings, and aspirations, which are central to understanding the financial behaviours and attitudes of the Indian middle class.
Defining the Undefinable: The Middle Class in India.
What does "middle class" even mean? The term "middle class" in India is widely used, yet its meaning remains elusive for many.
Colonial Influence. The middle class in India has origins in the British colonial period. The middle class is an offspring of the establishment of the British educational and legal system. With government jobs playing a significant role in its formation (that’s why the craze of Sarkari Naukari). These individuals were employed in various roles, often requiring education and skills different from traditional occupations.
After gaining independence, India embarked on a massive nation-building project. The middle class, with its education and skills, was seen as crucial to this process.
Liberalization brought about a significant shift in the identity of the Indian middle class, moving it away from the older, state-dependent model towards a more consumer-oriented one. Post-Liberalisation Changes in the 1990s led to a "new middle class" with increased consumerism and access to global amenities.
The new middle class has shifted its focus from government jobs to private sector employment, driven by the expansion of the service sector and the IT industry. The Indian middle classes increased in number and in wealth after 1991.
The growth of the leisure and entertainment industry, including malls, restaurants, and amusement parks, has contributed to the increasing significance of lifestyle as a status marker for the middle class.
Impact of Globalisation: The new middle class has benefited from globalisation through increased job opportunities and access to consumer goods. This has led to a surge in income and an image of success associated with economic reforms.
In today’s India, the concept/term is used to indicate the inclusiveness of the diverse fragments of a income/consumption/lifestyle class.
Aspirational Identity Many people aspire to be considered middle class, even if they don't fit traditional economic definitions. Everyone wants to be considered as belonging to the middle class nowadays.
The Definitions and methodologies.
Studies using wealth index parameters have found that the middle class ranges between 10 and 20% of the country’s population.
How do NCAER define India's middle classes?
The National Council of Applied Economic Research (NCAER) has been at the forefront of shaping the debate on who constitutes the middle class in India.
In their report on Indian market demographics, the NCAER created five distinct segments ranging from the "very rich" to the "destitutes". This social classification is built around a consumer-based identity with the "consuming class" standing in for the new middle class. The lower-income rural and urban working classes are constructed as "climbers" and "aspirants" striving to reach the standard of this "consuming class".
Generational Differences. Classifications also consider generational differences. For instance, surveys have categorised urban consumers into 'technological babies' (8–19 years), 'impatient aspirers' (20–25 years), 'balance seekers' (25–50 years) and 'arrived veterans' (51–60 years). The youngest segments are seen as embodying the promise of the new middle class and its ability to shape future trends.
According to their study (2007–08), 126 million households are in the middle income category, earning between 3,830 and 22,970 US dollars annually. They also identifies the middle class as comprising "seekers" and "strivers" based on annual household income.
'seekers' with an annual household income between Rs. 200,000 and Rs. 500,000, and 'strivers' with an annual household income between Rs. 500,000 and Rs. 1 million (at 2001/2002 prices).
Size of Indian Middle Class: NCAER Estimates.
In 2005, the NCAER put the middle class at 50 million people, or roughly 5% of the total population. In 2007–2008, the middle class formed ~11% of the total Indian households but held nearly one-fourth of the total income and saved more than 55% of its income. By 2011, this had increased to 142 million people, approximately 12% of India's population.
Rajesh Shukla's "How India Earns, Spends and Saves: Unmasking the Real India" (2010) provides insights into income and expenditure patterns within India. This study is useful in understanding the economic dimensions of the middle class, and how it relates to consumption and savings patterns in India. Here, he rescaled National Survey of Household Income and Expenditure (NSHIE) survey using national accounts data and found that the Indian "middle class" doubled in size over the last decade, growing from 5.7% of all Indian households in 2001/02 to 12.8% in 2009/2010.
Few days back we went deep into consumption patterns How Indian Spend?. Post that I was asked about the size of the various income-bands. So, here is our attempt for slicing the data from a different lens.
While there's no single, universally accepted definition, income tax data can offer a valuable lens through which to examine a segment of this elusive demographic.
The Tax-Paying Middle Class: Insights from Income Tax Data.
Defining "middle class" solely based on income tax filing data in India presents some challenges, as not all middle-income individuals file taxes. However, using this data allows us to focus on the "formal" middle class – those whose incomes are documented and taxed.
“Income tax returns are the most imaginative fiction being written today.”
― Herman Wouk
The Under 7% Story: India's Income Puzzle.
In the 2023-24 Fiscal Year, only 6.68% of the population filed income tax returns. This translates to roughly ~8 crore individuals out of a population of over 1.3 billion. A significant portion of those who file returns report zero taxable income. In 2023-24, nearly 4.90 crore individuals filed zero-tax returns. This means they filed for compliance purposes but did not owe any tax.
The Middle Class in Numbers: An Income Tax Perspective.
We look into data from last 5 years. But, we are focused on the salary income only. An salary income tax return is more closer to reality, given less possibilities of manipulation or omissions.
Total Salary Income:
AY 2020-21: The total salary income for individuals was ₹23,29,444.43 crore.
AY 2021-22: This increased to ₹24,57,701.98 crore.
AY 2022-23: The total salary income further rose to ₹29,59,016.86 crore.
AY 2023-24: A further increase to ₹35,23,216.50 crore.
This shows a consistent growth in the total salary income reported across these assessment years. Between AY 2020-21 and AY 2023-24, there's an overall growth of approximately ₹11,93,772.07 crore in total salary income. The most significant increase in salary income occurred between AY 2022-23 and AY 2023-24.
This is what the first-cut of Under 7%, looks like. The total population distribution of Salary Income is:
How have we defined the Income (Low-Middle-High) Bands:
Low - Zero and anyone who has filled the income of <2.5 lakh
Middle - income of >2.5 lakh and < 20 lakh
High - anyone with > 20 lakh
Interesting the our definition of Middle - income class has remained static in the last 5 years, i.e. 37% of Tax Fillers.
The Salaried Middle class is ~2.6% of our population. [ 37% of the 7%]
But, what about “India can be divided into India1, India2, and India3”.
Long back 2022, we wrote about various cuts of India. So, we decided to further break this Middle class into three subsets,
Low-Middle class: Salaried income of >2.5 lakh and < 5.5 lakh
Middle-Middle class: Salaried income of >5.5 lakh and < 9.5 lakh
High-Middle class: Salaried income of >9.5 lakh and < 20 lakh
Middle Class Math.
Now, the numbers and distributions is like this:
Here is the trends of ALL the 5 sets of Salary Bands (based on counts) over last 5 years:
And, the distributions for all the 5 bands for each years:
Note: Here we focused on the % distributions of all the bands. For a better understanding.
Widening Income Gap: Upper Middle Class Thrives While Lower Middle Class Shrinks.
Demographic shifts: for High-Middle Income, we can see the growth of 91.13% in last 5 years. The Middle-Middle Income has grown by 38.81%, and Low-Middle Income has declined by 17.22%. This data is showing increased inequality (distribution of High-Middle is now 26% from 16% 5 years back), with benefits disproportionately accruing to the upper middle class. OR more people entering high-skilled professions?.
It seems we have to deep dive more on this in the upcoming posts.
The Shrinking Lower Middle Class: decline in Low-Middle suggest that we are adding less from the Low-Income bands, while everyone is moving forward, esp High-Middle income. Is this Rich are getting Richer effect? OR it has some elements of COVID effect?
CAGR of High-Middle Income is ~13%, does this is what driving the ‘Premiumisation of Indian Consumptions’? i.e. As incomes rise, there is a move from basic necessities to luxury items.
drop us email at thebizdomin@gmail.com we will be happy to give you the working excel file and other stuffs, so that you can also play with this data.
How else you can Define this class?
The reported Income Tax figures don't always reflect the actual purchasing power of individuals. Argument for this: India has a large informal sector (even today) where transactions are often cash-based and incomes go unreported. This could mean that many people are earning taxable income but not declaring it.
The other way of determining the middle class involves a mix of economic, social, cultural, and political factors.
More than just money: While income is often a factor, it's not the only one. Education, occupation, social standing, lifestyle, and even aspirations play a role. These factors are complex and can't be easily measured.
Consumption patterns: The middle class is known for its consumption of certain goods and services, such as consumer durables, entertainment, and education for their children.
How else to define it beyond income? or what are the good proxy to estimate incomes. Here is our suggestion - LOL!
Lifestyle: How you live? What you buy? The things you own? Family Size?
Occupation: What you do? What kind of job you have? Your education?
Location: Where you live? cultural values, and social aspirations.
“higher income is associated with a reduced ability to enjoy the small pleasures of life.”
― Daniel Kahneman, Thinking, Fast and Slow
Why it matters?
In India, consumption is not simply an economic activity but a source of identity for the middle class. This identity is recently (increasingly) tied to the concept of premiumisation, facilitated by economic liberalisation and globalisation. Premiumisation in consumption reflects a shift towards higher-quality goods and services, often associated with improved lifestyles and status.
Also, the middle class is a big part of Indian society, understanding them helps will help Policymakers, Business, Political parties to understand this segment better, in order to sell their Policy, Product and Agenda.
Consumer Base: The middle class represents a substantial market for consumer goods, making it essential for businesses to understand their preferences and spending habits.
"Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like." - Will Rogers
Electoral Impact: Political parties recognize the importance of the middle class as a key voting bloc and tailor their policies and agendas to appeal to this demographic. This middle class often supports economic liberalisation, market reforms, and policies that promote their interests.