The context of Budget 2025-26 has brought into focus the need to raise the employment intensity of India’s economic growth and address the stagnation of income and wage levels. It also simultaneously rekindled the debate over the size, status, and potential of India’s “middle class”. Policymakers have noticed that those belonging to relatively “well-off” socio-economic classes are also seeking tax reliefs from the Budget, disguising themselves as part of the middle class. At the same time, anecdotal evidence of a “shrinking” of the median and below segments of the middle class is being corroborated by consumption market surveys. Kantar reported that the number of lower middle-class households was down 25% in 2024 compared to 2019, while the affluent ones surged 86%. To be sure, this trend is also mirrored in income-tax data — taxpayers with income above Rs 50 lakh a year account for almost half of gross total income reported by all taxpayers in the assessment year (AY) 2023-24. In other words, the shares of the lower income groups in both national income and taxable income are declining. Put plainly, India’s middle class isn’t well-off, even as the well-off clearly aren’t, and cannot be, middle class.
The income structure of the country is not being transformed from inverted pyramid into a diamond shape, with a burgeoning middle class, as many had anticipated. Sales data from producers and retailers are signalling an exhaustion of the large sections of urban consumers, except the super rich, after the post-Covid splurge. It may well be the case that lakhs of people are falling below the threshold for being a (income) taxpayer, after having crossed it. This is clearly indefensible for a country which aspires to grow its middle class from a little over 30% of the population to over a billion or 60% by 2047.
Amidst this scenario, reports cite the results of household consumption expenditure surveys (HCES) to show a “sharp decline” in poverty incidence. For these assumptions, the poverty line, defined by the Suresh Tendulkar committee one and half a decade ago, is applied on the HCES findings. Those poverty yardsticks are seriously out of date. As such, 90% of rural Indians reported average monthly per capita expenditure of less than Rs 5,763 in 2023-24, while those in the 0-5% “fractile class,” at the bottom of the pyramid, just Rs 1,677, and persons in the 5-10% class Rs 2,126. Given the high inflation rates over the recent years, these numbers betray very low purchasing power among vast sections of people.
With the external situation appearing to be grim, the short- to medium-term economic strategy of the country should necessarily be to rely heavily on domestic demand. The government is right in exposing the fallacy of the rich sections asking for further tax reliefs. However, it is not the right strategy to raise the goods and service tax rates for premium goods, which continue to be in high demand, despite the overall sluggishness in consumption. Prohibitive taxes on high-end articles and services could only add to the employment crisis, and create a vicious cycle. Just 6.7% of India’s population files income tax returns and hardly 3% actually pay tax on salaried income. While this base needs to expand, the policy emphasis now ought to be on ways to bolster the aggregate demand, with a greater thrust on improving total factor productivity. Liberal tax concessions for the true middle class are in order.