Why is the Indian Middle-Class Suffering?

Consumption patterns show that India’s urban middle class is suffering. We believe that there are 3 reasons for this: (a) In offices & factories, technology is replacing humans in jobs entailing routine work; (b) The Indian economy is in the early stages of a cyclical economic downturn; and (c) Household balance sheets in India appear to be in their worst shape in half a century. Whilst the Indian economy should emerge from its cyclical downturn in a few quarters, the potency of the other two factors could likely make things worse before they get better.

“The traditionally plump midriffs of many economies, which have provided middle-class people with well-paid jobs in the past, are disappearing. In many countries, as a share of overall employment there are now more high-paid professionals and managers – as well as more low-paid care workers and cleaners, teaching and healthcare assistants, caretakers and gardeners, waiters and hairdressers. But there are fewer middling-pay secretaries and administrative clerks, production workers and salespeople.” – Daniel Susskind in his book ‘A World Without Work: Technology, Automation, and How We Should Respond’ (2020)

The rise of the middle class is a well-documented phenomenon

As any free-market economy develops, it brings in its wake a slew of social & economic changes. One of the key changes that typically take place is the rise of a fast-growing middle class. This middle class consists of those who, using their enterprise and/or intellect, rise from the trenches of low-income cohorts.

In the United States, in the period after the second World War, the middle class quickly became a key demographic – socially, politically, and economically. The impact of this ascent was profound. Daniel Susskind has said in Finance and Development Magazine (IMF) in September 2024, “As the 20th century unfolded, the demands of war faded. Yet the pursuit of growth stubbornly persisted. For growth, it turned out, was also associated with almost every measure of human flourishing. Growth freed billions from the struggle for subsistence, with extreme poverty dropping from 8 in 10 people in 1820 to just 1 in 10 today. It made the average human life longer and healthier—turning obesity, rather than famine, into the rich world’s main problem. And it dragged humankind out of ignorance and superstition: 9 in 10 were illiterate in 1820, but 9 in 10 are literate today.”

India too has seen a large middle class emerge over the past 40 years. In fact, if we were to look at the Income Tax Department’s data for individual taxpayers, individuals earning between Rs. 10 lakhs and Rs. 1 crore have seen their incomes grow at roughly 20% p.a. in the decade that went by, whereas those earning less than Rs. 10 lakhs of annual income have seen an annual growth of just 12% (see chart below).

Things go awry for the Indian middle class

Recently, however, there has been a lot of chatter around the ‘slowing down’ of consumption of items and services typically associated with the urban middle class. Nestle India’s MD, Mr. Suresh Narayanan, said after the firm’s Q2 FY25 results that “there used to be a middle segment which used to be the segment most of us FMCG companies used to operate in, which is the middle class of the country. That seems to be shrinking. And there is a completely, purely price-quality-be-damned-led segment, which also seems to be doing reasonably well.” [source: Financial Express]

Mr. RC Bhargava, chairperson of Maruti Suzuki, explained in an interview that “In FY18-19, 82% of the cars that were sold were below ₹10 lakh. Now that segment is not growing anymore. It is declining actually. So you can judge for yourself if that large segment does not grow and actually declines how much can the other segment grow and make up for this 80% segment.” [source: CNBC TV18]

Mr. Narayanan’s, Mr. Bhargava and others’ concerns are well-founded as incrementally data on consumption of items that are typically found in a middle-class Indian’s basket has slowed or even started degrowing (see exhibit 1).

So why are the wheels coming off from the Indian “middle class” story?

As we try to understand this phenomenon, we find that over the past 40 years something similar has taken place in the developed economies. As Daniel Susskind explains in his 2020 book ‘A World Without Work: Technology, Automation, and How We Should Respond’ –

“Starting in the 1980s, new technologies appeared to help both low-skilled and high-skilled workers at the same time – but workers with middling skills did not appear to benefit at all. In many economies, if you took all the occupations and arranged them in a long line from the lowest-skilled to the highest-skilled, over the last few decades you would have often seen the pay and the share of jobs (as a proportion of total employment) grow for those at either end of the line, but wither for those near the middle. We can clearly see this trend [in the exhibit below]. This phenomenon is known as ‘polarization’ or ‘hollowing out’.” [square brackets are ours].

In India, too, we now see clerical, secretarial and other routine work in offices & factories being automated. So far, AI is not required to automate these jobs e.g., you don’t need AI to replace a teller in a bank branch with an ATM. However, as AI gradually becomes sophisticated (as generative AI makes the bots cleverer), it seems reasonably certain that more white-collar jobs will be lost. As Rishad Premji, Chairman of Wipro, puts it, “I think that two-three… elements that people think which are very important is the disruption of the technology process… the reality is, there are going to be some jobs that will disappear…“I think the good part is the opportunity to disrupt virtually every aspect of our life with the productivity that AI can bring is going to be incredibly powerful.” [source: Money Control]

In fact, if we were to look at the recently published data in the Annual Survey of Industries, the number of supervisors employed in manufacturing units (as a % of all employed) in India has gone down significantly (see exhibit below).

Nandita Rajhansa and Saurabh Mukherjea work for Marcellus Investment Managers (www.marcellus.in). Nestle and Tata Consumer Products Limited are part of Marcellus’ portfolios. Nandita and Saurabh may be invested in these companies and their immediate relatives may also have stakes in the described securities. The stock mentioned is for illustrative purpose and is not recommendatory.