The pandemic has shrunk the middle-class | Photo Credit: V RAJU
The pandemic has shrunk this segment. Policies for, and data on, the middle class must improve
The world is increasingly seeing India as a major consumption market. This view is based on India’s middle class as avid consumers with sizeable spending capacity and disposable income. India’s buoyant equity markets, unicorn churning startup ecosystem and growing internet user base is contributing to this view. This is what attracts global businesses and investors to set up shop to cater to this segment.
Many estimates put the segment of middle class to be around 35 crore of the India’s 135 crore population. In a country where consumption constitutes three-fifths of GDP, the economy has relied heavily on the spending power of the middle-class consumer. Historically, the top 20 per cent of this segment has been the prime mover behind as much as 59 per cent of the discretionary spending in rural India. In urban India, this goes even higher — a whopping 66 per cent.
Amongst the underserved markets, this chunky segment is the most lucrative block after China. And, the advantage India offers over China is better intellectual property rights protection and an even-playing field for consumer brands. So global businesses’ trademarks and proprietary technology are better protected, and the state does not impose its machinery to infringe in any of these IP rights.
How large is the middle class?
What the pandemic achieved by economic destruction is this: it appears to have shrunk India’s middle-class population by 3.2 crore and driven more than twice that number below the poverty line in 2020, according to a Pew Research Centre report, based on an analysis of the World Bank data. As a huge number among them were forced to fall back on their savings, many who had graduated to the middle class over time eventually fell out of that category.
At the other extreme there are some economists as well as consumer industry analysts who have argued that the true number of Indian middle class is just about 3-5 per cent of the total population (4-7 crore individuals only).
Right in the middle of this volume-of-middle-class-storm, we have brands which have been launched with wrong data assumptions. Hopefully this debate will be settled once the latest Census survey is done and data published. Unless this debate is solved with data, our ability to have ‘addressable market’ will remain a matter of rhetoric, rather than reality.
It is important to take cognisance of the right data sets. Surrogate data sets, if wrongly used, could lead to wrong outcomes. Also, a sizable section of well-off farmers are not counted, as farm income in India is outside the income tax purview.
Taking one data set for example, one can see the discrepancy. India has just over 60,000 individuals who declare an annual income of over ₹1 crore. A thumb rule in housing finance sector shows that 3-5 times gross annual income would be taken as loan eligibility, subject to other risk criteria of age, profession, geography, etc. By this measure only 60,000 individuals would be eligible for a home loan of ₹5 crore-plus.
On the supply side, if we try to map the number of houses costing more than ₹6 crore (assuming lenders offer only 80 per cent of property value, as is the norm), the number would be way more than this, even adjusting for the data point that many houses are bought in company names. So there is clearly a considerable underreporting of this segment.
Best estimates suggest a middle class of between 18 and 22 crore population.
In the entire purchasing power discourse, we forget to look at any impact on the purchasing intent from a culture perspective. Disposable wealth or income cannot be the standalone yardstick for purchasing power. For example, a popular coffee chain brand that entered India many years ago took much time to even break-even. Not because people could not afford the coffee pricing — despite it being more expensive than the average middle class restaurant — but simply because coffee was not the preferred beverage. The concept of “cool” was different in that era ! Cafés were not the in-place to hang out !
Similarly for soft drinks, where cola giants assumed a simple increase in per capita consumption on a wide base. But in actuality the Western norms of washing down a meal with a soft drink that was an integral part of a food combo or a cola-snack when watching television was alien to most Indians.
Middle class and the economy
Inflationary pressure might force the middle class to start bringing down their consumption further, which may not augur well for the economy in the short term. Late Lester Thurow, the eminent MIT economist, said: “A healthy middle class is necessary to have a healthy political democracy. A society made up of rich and poor has no mediating group, either politically or economically.”
One of the constant bugbears of the middle class is the poor quality of public infrastructure — something that needs urgent attention. Looking at past few years of newer infrastructure being built and hopefully with projected capacities being met to time and quality standards, that feeling of despondency should change.
It is a mindset shift that the middle class has to accept: that public sector jobs that they have looked at as panacea, is not for the taking. The middle class has to accept that the gig economy is real. In this aspect, the government has been doing well on creating a start-up ecosystem as well as to push for private sector employability.
While the rich don’t get too impacted for monthly household expenses, and the economically weaker rightfully get subsidies and necessary governmental attention, the middle class can do with better policies for them and proactive communication from the policymakers and politicians alike.
It’s about time we learn to decodify our thinking around the ‘middle class’ segment and bring policies to help them. And start having proveable economic data to quantify various consumer segments. Else, the attraction of ‘India as a big consumer market’ won’t entice the world and won’t draw investments or consumer marketeers, for they want conspicuous consumption, and not paper business plans !
Mathias is a Business Strategist & Angel Investor, and Sridharan is Corporate Advisor & Angel Investor
Published on March 18, 2022