How Large is Indias Middle Class

Written by Subhash Agrawal | Updated: Dec 5 2002, 05:30am hrs
It has taken ten years and a recent report by a Mumbai-based group for the international media to discover that Indias business-class economy is not all big, or that the bike and bullock economies threaten to become a drag unless cared for very soon. The reports use of catchy titles has drawn attention to and once again brought to the fore the question: How large is Indias middle class The usual number thrown about is 250 million. This figure, now set in stone and upon the lips of every cola-and-soap-selling executive, originally resulted from a seminal study conducted by the National Council of Applied Economic Research ten years ago, but the original definition included categories of people with enough buying power for items such as cigarettes, matchboxes, candles, combs and soaps. Or, to put it another way, just about anyone who was not totally destitute.

However, looking around, not just anecdotally but at proxy data on the middle class, provides some stark contradictions and a depressing look at reality. An estimated 350 mn out of 1 billion Indians fall below the poverty line. Two-thirds of Indian children under age 5 are malnourished. The population of stock market investors is less than 7 mn. The number of credit card owners is less than 5 mn and the average per-card spending is less than Rs 1,000 per month. In India, the ratio of consumer financing to GDP in India is 2.6 per cent, while in developed countries this ratio is normally 40-50 per cent and in SouthEast countries it is 7-10 per cent. There are only 7 mn mobile users and 32 mn fixed-line subscribers. Even Indias fabled information technology success story rests primarily on the shoulders of a handful of companies, with far less diffusion effects across the country. Most tellingly, there are only about 6 mn income tax payers those who actually pay tax, not those who merely file a return out of which only half a million with an income over $10,000. In fact, till 1997 there were only 1.2 mn income tax payers.

So where is this 250 mn strong middle class hiding

The fact is, nobody knows for sure how big the market is. Different agencies and commentators have produced scaled-down figures, but even these are open to doubt. Given the lack of systematic capture of data regarding 1 bn people and their economic activity, one can only do intelligent guesswork. And one way is by using the number of people who work in the organised sector (public and private) as part of the salariat class. This is about 30 mn. However, this includes peons and other lowly paid staff, many of whom would normally not be considered middle class consumers for branded goods in any meaningful way. Deducting 15 per cent for this class, and adding another 10-15 mn for doctors, consultants, lawyers, small businessmen and rich farmers who somehow escape the tax net, we arrive at a figure of about 40 mn.

This is a very crude method and far removed from popular wisdom but is probably a more realistic assessment of Indias fabled middle class, at least as defined in Western terms. But 40 mn is a significant number, a bigger market than Austria, Hungary, Czech Republic and Poland combined. On top of that, the long term potential remains strong. India has a very youthful demography, with more than 80 per cent of the population below 45 years as long as there are no external shocks and internal meltdown. If handled properly, the number of rural middle income households could grow exponentially and provide the next big boost to consumer spending and market growth. The rural market already accounts for over one-third of consumer sales, and most of the really Big Ideas of the future such as healthcare, energy, housing, transportation and education revolve around the rural economy.

What are foreign investors to make of all this Popular estimates have clearly been misleading and distorted by self-serving studies and consultancy reports. There has been an overselling of India. But the bottomline, as in so many other things about the country, is that the middle class market is neither to be ignored nor fawned over.

The author is an analyst of Indian political and business trends and the editor of India Focus, a political risk report for international investors