By Srinath Sridharan and Lloyd Mathias
The estimation of India’s middle class has been a subject of much debate and contradictory numbers, raising concerns about the accuracy and reliability of such projections. Culturally and socially, many Indians, including those amongst the top economic bracket, would casually term themselves middle class, self-effacingly believing the fallacy or just being uncomfortable calling themselves rich. While recent studies forecast a significant expansion of the middle class in the next few decades, it is essential to approach these estimations with caution and acknowledge the impact they will have on public policy.
According to a recent study—PRICE’s ICE 360° pan-India primary survey—the Indian middle class, a significant driver of economic growth, is projected to expand substantially. The survey encompassed over 40,000 households across both rural and urban areas in 25 states. The study indicates that the middle-class population, defined as individuals with an annual income of Rs 5-30 lakh, will rise from 31% in 2020-21 to 61% in 2046-47. The estimated figures suggest that the middle class will reach nearly 1.02 billion by 2046-47, a significant increase from 715 million in 2030-31 and 432 million in 2020-21. Concurrently, the study predicts a decline in the destitute population (earning less than Rs 1.25 lakh annually) and aspirer groups (earning Rs 1.25-5 lakh annually), from approximately 928 million in 2020-21 to 647 million by 2030-31, and further down to 209 million by 2046-47.
Estimating the size of the Indian middle class is a challenging task due to several factors. First, the definition of middle class itself varies widely, encompassing income ranges, consumption patterns, and quality of life indicators. Different studies employ different criteria leading to divergent results and a lack of consensus. This inconsistency creates confusion and undermines the credibility of these estimates.
Next, projections regarding the growth of the Indian middle class heavily rely on assumptions and variables that are subject to change over time. Factors such as geopolitical dynamics, global economic trends, and domestic challenges can significantly impact the trajectory of economic growth and social mobility. Fluctuations in these variables often render long-term projections inaccurate or outdated. The use of statistical sampling and extrapolation techniques in surveys contributes to the discrepancies observed in middle-class estimations.
While these methods provide a cost-effective and timely approach, they can suffer from sampling biases, methodological limitations, and potential errors. Defining the middle class solely based on income brackets oversimplifies and underestimates the reality. Often, respondents are uncomfortable disclosing incomes fearing surveys being hand in glove with government agencies. The reliance on surveys alone without a robust and regular census can undermine the accuracy and reliability of the data.
Furthermore, diversifying the definition of the middle class beyond income brackets can provide a more comprehensive and nuanced understanding of economic well-being. Including factors such as access to quality education, healthcare, housing, and social security can offer a more holistic perspective on the middle class.
The most commonly used consumer segmentation has been the socio-economic classification (SEC), as a surrogate for consumption to estimate the market potential of goods and services. The SEC used education and occupation of the chief wage earner to classify urban Indians into seven groups, where amongst the A1 to E2 classification, A1-C were considered the middle class. For rural Indians, the parameters were education and type of house lived in. They were classified on a scale from R1 to R4. In 2011, this was revised to the education of the chief wage earner and ownership of consumer durables/land on a 11-point scale, valid for both rural and urban Indians. Factors such as technological advancements, automation, economic disruptions, and evolving socio-cultural norms can significantly impact the composition, aspirations, and dynamics of the middle class, but are missing from current methodologies.
The informal sector plays a substantial role in the Indian economy, and a significant portion of income generated within it remains unrecorded. Surveys may struggle to capture the income and economic status of individuals engaged in informal activities, leading to underestimation or misrepresentation of the middle class population.
Another factor that can contribute to the echo chamber effect is the interpretation of survey results in isolation, without considering the broader socio-political and economic dynamics at play. Economic growth, policy changes, geopolitical shifts, and global economic trends can all have substantial impacts on the trajectory of the middle class.
To overcome the challenges posed by statistical sampling and extrapolation, it becomes imperative to prioritise regular and updated census exercises in India. Transparent and up-to-date census data can support the formulation of investor-friendly policies, economic reforms, and regulatory frameworks that create a conducive business environment. This enhances investor confidence and attracts long-term investments.
While the current decennial census offers valuable insights, increasing its frequency to once every five years, in sync with parliamentary terms, could provide policymakers with the latest and most reliable data for informed decision-making. This could help the new government that takes over with the newly-convened Parliament to use the latest census data for better policy development. Leveraging India’s digital stack could facilitate the development of a digital public infrastructure for conducting the census efficiently, minimising time and effort.
Writers are respectively, policy researcher & corporate advisor and business strategist & early-stage investor