India’s Middle Class: Growth Engine or Loose Wheel?

Tsering Topgyal/Associated Press A demonstration outside the Presidential Palace in New Delhi against the gang rape of a 23-year-old woman in the capital on Dec. 16, 2012.

They are the “bird of gold,” the star performers who have led India’s rapid economic ascent of the last two decades.

Global brands and leaders now woo them with zeal. They are the opinion makers in the press and social media; they reside closest to political power in spite of being a small fraction of India’s total population and policymakers scurry to keep them happy, or suffer in the polls. Increasingly, they are showing their street heft in Delhi with protests against corruption and gender violence.

They are the all-consuming, great Indian so-called middle class.

But is the middle class indeed India’s growth engine as the country looks to be a 21st-century power? Or is the group’s potential overstated, its weaknesses ignored in the hubris? Is it the loose wheel that will derail the India train?

Over the next week India Ink will explore these questions, looking at the origins of the middle class, its postcolonial evolution and structural weaknesses, its political beliefs and economic motives.

First, some clarity about who exactly we’re talking about:

Only a quarter of India’s 1.2 billion people can be defined as “middle class” according to standards set by the Asian Development Bank. They are all in the top third, by wealth, of Indian society, but in absolute numbers they are about as big as the entire American population.

At 25 percent of the population, India’s middle class is small - that compares to 63 percent in China, 50 percent in Bhutan and 40 percent in Pakistan.

Courtesy of Mckinsey Global Institute Projected growth of middle-income Indians between 2005 and 2025.

But since India starts from a low per capita income base and has the advantage of volumes, the projected numbers can look staggering.

India’s total household consumption is expected to multiply four times in just two decades, between 2005 to 2025, according to the McKinsey Global Institute. By its estimates, the country’s middle class will be 583 million strong by 2025, making India the world’s fifth-largest consumer market. By more optimistic projections, like one by the World Bank economist Ejaz Ghani, Indian will have more than a billion middle-class citizens by 2025 â€" that is about two-thirds of its estimated 2025 population.

The fate of the middle class and that of the Indian economy are in lockstep: the hope is that their rising incomes will fuel consumption, which will drive demand and productivity, leading to more employment and a further rise in incomes, including in that of the poor.

But a closer look at this middle class reveals a glaring structural weakness in this virtuous growth cycle.

Four out of five middle-class Indians are in the lowest bracket of spending power, meaning they can spend $2 to $4 a day. Many of these 224 million people are not well educated, employed in unstable jobs in the unorganized sector and lack sufficient social safety nets. They could slip back into poverty if they experience a financial shock.

That insecurity has bred a political and economic conundrum for India: until the middle class has stable incomes and spending power, the economic contribution of its members will be offset by their demand for unviable populist measures from the government, amplified through their access to the media megaphone.

The base of high-spending middle-class consumers is still small. The “middle middle” (spending $4 to $10 a day) and the “upper middle” (spending $10 to $20 a day) together make up just over 50 million people. This group is essentially part of India’s elite, when contrasted with the rest of the population, yet barely middle class by global standards.

Sivaram V/Reuters A jewelry showroom in Kochi, Kerala, on Apr. 24, 2012.

Aside from the structural economic weakness, there are cultural weaknesses as well. The vast majority of India’s “middle middle” and “upper middle” are trained to do clerical and white-collar jobs. They look to the government and the rich to provide them with jobs; they look to the government and the teeming poor to provide them with cheap goods and services.

The entrepreneurial middle class is still not strong enough for a country of India’s size. The middle class still prefers to do jobs rather than create jobs; starting up companies is still not the normal middle-class thing to do, as this report points out.

These cultural weaknesses can be traced back to India’s feudal social structure and the formation of the colonial middle class in the mid-19th century.

Tuesday: Examining the historical roots of India’s middle class.