India's Middle Class Has Shrunk by a Quarter. Here's Proof

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India’s urban middle class has been crushed in the past 5 years. We knew it anecdotally. Now, the latest data released by the tax department has confirmed it.

But before I proceed, I should clarify what I mean by ‘middle class.’

It is a socio-economic term, which refers to a group of people who believe their voice needs to be heard. They live in the cleaner parts of India’s cities. Advertisers and media houses vie for their attention. They form the bulk of the consuming classes, buying cars, washing machines, microwave ovens, double door refrigerators. They have hand wash and toilet rolls in their bathrooms. They send their kids to better English medium schools, and pack cheese sandwiches and pasta in their lunch.

In India, their single-biggest identifier is that they pay Income Tax. And, of course, whine about their taxes being wasted on ‘freebies’ to the undeserving.

How big is this middle class? Minuscule, and shrinking.

Take the number of people paying income tax for starters. In 2017-18 there were just 3.3 crore income tax-payers. And in 2022-23 that dropped to a shade above 2.8 crore. In terms of our overall population, the number of income tax-paying individuals has gone down from 2.5 percent to just two percent now.

Of course, this is mostly because of the tax breaks given to people at the bottom of the income tax ladder in recent years. Even though the concessions aren’t much, a huge proportion of people have escaped the income tax net.

In fact, there are others who escape the tax net. Big landowners who have sold parcels to infrastructure and real estate projects and have become cash-rich. Some small entrepreneurs in the unorganised economy, who often make cash transactions, and avoid paying taxes.

These numbers might not be large, but in advanced economies they would have had to pay some income tax. Again, socio-culturally, they would not be part of, what has historically come to be known as, the middle class.

Even among income tax-payers, a large proportion cannot really be called middle class. Today, in any of India’s metros, it is impossible for a standard family of four to lead a decent middle class life for less than Rs 1 lakh of pre-tax income per month.

Given that there are 1.3 earning members in an average family, one could say, that an individual needs to earn about Rs 80,000 per month, before taxes, to be counted as middle class.

Anyone earning more than Rs 2 lakh a month is also not ‘middle class.’ Once you cross that level, your consumption habits tend to change, putting you in a more ‘affluent’ section.

So, for the purposes of our calculations, I will take anyone with a pre-tax income of Rs 80,000 to 2 lakh per month as ‘properly’ middle class.

On the face of it, the size of this middle class has more than doubled in just five years: In 2022-23, there were 1.1 crore people who fell in this bracket. In 2018-19 that number was just 45 lakh.

This comparison, however, is deeply misleading.

That is because Rs 80,000 earned in 2017-18 could buy much more than the same amount five years later. To compare apples to apples, we have to adjust the numbers for inflation.

Between 2017-18 and 2022-23, retail prices in urban India went up at an average annual rate of 5.5 percent. But this is an average for all income groups. Anecdotally we know that the prices of things that the middle class buys went up at a much faster rate. I will conservatively assume a ‘middle class’ retail inflation rate of six percent, although it is bound to be much higher.

Once we adjust 2017-18 incomes for inflation, to make them comparable with the 2022-23 data, we find that there were about 1.6 crore people with a ‘real’ income of Rs 80,000 to 2 lakh who would have qualified to be included in the middle class.

In other words, the ‘middle class’ has actually shrunk from 1.6 crore in 2017-18 to 1.1 crore in 2022-23. That’s 50-lakh people who have moved out of this middle class space.

Have they moved up?

Some have. The number of people with a real income above Rs 2 lakh per month has gone from 0.16 crore to 0.26 crore. That means, about 10 lakh individuals have moved up the scale, out of the ‘middle class’ and into a more affluent group.

What happened to the remaining 40 lakh people?

They have slipped below the ‘middle class’ income level. In fact, there has been a big jump in the number of people earning between Rs 45,000-80,000 per month in 2022-23, compared to 2017-18, even after we adjust for inflation. Their numbers have increased by about 35-40 lakh. A significant portion of India’s erstwhile middle class has slipped into this segment.

The income tax data clearly indicates that about 25 percent of those who were ‘middle class’ in 2017-18 became poorer five years later. Only five percent have become richer.

No wonder corporates, from Asian Paints to Nestle, are feeling the heat. Because India’s middle class has cut back sharply on all forms of consumption. They have stopped investing in assets like cars and homes. They are not replacing gadgets at the same rate as they used to. They are switching to cheaper alternatives when it comes to things of everyday use.

They are no longer eating out at mid-rung restaurants, and have moved to cheaper fast-food alternatives or are ordering food from outlets that offer big discounts on delivery apps.

What about India’s crorepatis?

On the face of it, their number has risen dramatically from a little less than 98,000 in 2017-18 to 2.3 lakh individuals in 2022-23. Here again, we need to adjust for inflation to get a comparable number. One crore rupees earned in 2022-23 was the same as about Rs 75 lakh earned in 2017-18. Using that year’s income tax data, we can ‘guesstimate’ that there were about 1.6-1.7 lakh ‘inflation-adjusted’ crorepatis back then. That means the number of super-rich Indians has gone up by 60 to 70 thousand individuals.

These people have sustained the market for high-end assets and premium products and services. But even that is now reaching a saturation point. After all, there is a limit beyond which even the richest family cannot buy luxury cars or ultra-high-end TV sets. Their demand can only be cyclical, based on changes in fashion and the need for replacements.

What does this hold for the future? Unfortunately, things can only go from bad to worse for the middle class.

If there is no demand for goods and services, companies have no reason to expand their businesses. That means fewer jobs and lower pay hikes. On top of that, a big part of white-collar work can now be replaced very cheaply by using AI. Most corporates are already doing that. And this is just the beginning.

[Note: The data used for comparison is for the Assessment Years 2018-19 and 2023-24. This refers to taxes collected for income earned in the year 2017-18 and 2022-23 respectively.]

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)