The Indian middle class’s poor performance, crushed under the weight of rising inequality and stagnant opportunities, while the government continues to celebrate GDP numbers and rising billionaire-rankings, could be seen as a damning indictment of the Modi government’s economic track record.
India’s deeply divided middle class has for long been defined as the social strata who are not living their life hand to mouth but have a little to spend after their conspicuous spending. A closer look reveals they’re hardly rich by any real sense when the expenses of life take over.
The financial realities paint a worrying picture. Data from the income tax department indicates that individuals earning between Rs 10 lakh and Rs 1 crore annually constituted only 3.7% of all income tax filers in 2011-12. By 2022-23, this proportion had quadrupled to 16.2%, with these earners contributing nearly one-third of all taxes. While this increase might seem indicative of prosperity, a deeper examination reveals that the costs of maintaining a middle-class lifestyle have grown disproportionately, diminishing the financial stability of this group.
Simultaneously, the 2023-24 household consumption expenditure survey from the National Sample Survey Office (NSSO) highlights that approximately 65% of total expenditure in an average household is consumed by essential expenses like food, rent, education and healthcare. This leaves little room for savings or investments, leading to a steady decline in household financial reserves. Upon further examination of the same we saw that India’s household debt accounted for 17.4 % of the country’s Nominal GDP in March 2024, which, when compared with the ratio of 14.8 % in the previous year, signals a Y-O-Y increase and a concerning trend.
This framework offers a starting point to explore how growing household debt, combined with stagnant real wages and rising living costs, poses significant risks not just to individual families but to the broader economic stability of the nation.
Source: CEIC Data
Furthermore, retail inflation has exacerbated the financial strain on middle-class households, particularly through skyrocketing prices in essential categories. In 2024, food and beverages contributed to high retail inflation, peaking at 9.7% in October.
Vegetables alone saw a staggering 42% price surge compared to the previous year, making them a major contributor to the overall inflation. Inflation in staples such as cereals remained elevated at 9-10% for most months. Milk showed a price rise ranging between 4.6% and 6.3%.
Luckily, we did see housing inflation performing modestly at 2.7-3.6%, and health costs hovered around 4-5.5%. However, the broader trends in retail inflation seem to continuously erode disposable income. Amid these pressures, stagnant real wages further compound the challenges of maintaining a middle-class lifestyle.
The graph below illustrates a troubling trend: real wages in urban India have been declining and, for the first time last year, fell below the levels seen during the pandemic. With retail inflation persistently high, this wage decline has significantly weakened consumer confidence.
Source: Bloomberg.
As essential goods and services consume a larger share of household budgets, disposable income continues to shrink, leaving families with little room for discretionary spending or savings. This downward pressure on wages, combined with elevated inflation in food and healthcare intensifies financial strain which ultimately stalls economic mobility. The middle class, traditionally seen as the engine of growth, is struggling to sustain even modest consumption, highlighting the urgent need for policies addressing wage stagnation and restoring economic confidence.
India’s middle class has however in part has underwritten these economic challenges by embracing a mix of religious fervour, nationalism and short-term financial incentives. This dynamic has influenced electoral outcomes, favouring immediate gains over long-term stability.
Also read: Will the Modi Govt Fix the Economy With the Union Budget 2025?
In the recent Maharashtra elections, the Bharatiya Janata Party”s (BJPs’) ‘Ladki Bahin’s Yojana,’ offered direct cash transfers to women. This played a pivotal role in their surprise success and a complete electoral rout of the principal opposition – the INDIA bloc. This wasn’t an isolated incident; a similar strategy has been used in the Haryana and Jharkhand assembly elections as well. These policies of using targeted welfare schemes to win votes is far from losing momentum in the near future. Major political parties are already pledging similar schemes in the upcoming Delhi assembly elections, further reinforcing this pattern.
While such initiatives may appeal to voters, they place a significant strain on the state’s exchequer, diverting resources from critical long-term investments. This approach not only undermines fiscal discipline but also perpetuates economic inefficiency which ultimately comes out of the people’s pockets. It is both naive and short-sighted for voters to prioritise these schemes, as they often fail to address the systemic issues plaguing the economy.
Source: ICE 360 Survey, PRICE
Over the decades budgets have skirted around the middle class’s concerns. Taxing this group at a steep 30%, while offering little in return through public services, has compounded frustrations. While corporate tax cuts and GST were introduced as growth engines, neither has delivered as anticipated. Corporate tax collections remain sluggish and GST revenue, though improving, has not bridged the gap.
Yet, there is an upside: a well-timed tax cut in the upcoming budget 2025-26 targeted at the middle class could create a virtuous economic cycle. As macroeconomic principles suggest, reducing tax burdens on this income group will spur higher consumption. This, in turn, can increase GST collections and expand the base of taxable earners as more individuals move up the economic ladder.
The government today faces a pivotal moment. It’s time for bold, innovative rethinking to empower the ‘real’ middle class. This budget is an opportunity for the government to push for targeted tax reforms, creating an urban consumption demand pull, and a focus on targeted job creation in services that directly benefit the middle class. India can reignite its economic growth trajectory while addressing long-overdue grievances. The promise of a thriving middle class is the bedrock of shaping the Indian dream.
Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, and Director, Centre for New Economics Studies. He is a Visiting Professor at London School of Economics and an Academic Visiting Fellow to AMES, University of Oxford.
Ankur Singh is a Research Assistant with Centre for New Economics Studies (CNES) and a team member of its InfoSphere initiative.
This is the second of a two-part series of macro-analyses by the InfoSphere team of Centre for New Economics Studies (CNES). Read the first part here.