The Chairman of Nestle India tells us something that macro-economic data has been starkly indicating for some time now — income and consumption are stagnating among the Indian middle-classes.
Suresh Narayanan, CMD of Nestle India, a leading FMCG company, called a spade a spade and spoke about the “shrinking middle-class” as his company experiences a severe slowdown in sales growth in the urban segment.
“There used to be a middle segment – the middle-class – where most of us FMCG companies used to operate in. That seems to be shrinking,” he said while releasing his company’s quarterly growth numbers. He said the slowdown is persisting for several quarters now which is unusual.
In May 2024, the CEO of Asian Paints, during an earnings call with analysts and investors, expressed scepticism about GDP numbers, which did not correlate with sectoral performance on the ground, though the very next day his company recanted his comments, saying they were “misrepresented.”
For some time now most serious corporate/market analysts have been talking about the tepid consumption growth in both rural and urban India.
Another tell-tale sign of the middle class not buying before the festive season is the well publicised news that auto car dealers are sitting on an unprecedented inventory of 7 lakh vehicles valued at Rs.86,000 crore.
The passenger car inventory with dealers has grown 75% compared to the same period in 2023. Such a demand slump has not been seen in a long time. Commercial vehicle sales have also declined 4-6% in 2024 compared to the previous year. Though two wheeler sales have shown some pick-up they are still below their 2018 levels.
Official spin masters have tried to suggest that the Indian middle-class was getting prosperous and bypassing the entry level passenger cars and directly moving from two wheelers to more expensive SUVs. The Chairman of Maruti Udyog Ltd , R.C.Bhargava pooh-poohed this claim and said consumers are not known to take such a big leap in consumption. SUV sales are higher because the rich continue to buy more and the middle-class by and large is still reeling from income stagnation. The classic K-shaped GDP growth recovery after Covid has led to an equally K shaped consumption pattern where premium segments are doing well but the middle segment is tepid.
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Rural wage and consumption stagnation has persisted for nearly a decade now. The increasing stress in urban consumption in recent months persists inspite of a GDP growth forecast of 7% plus. Why is this higher GDP/income growth not translating into higher broad based consumption remains a puzzle. Note that the official consumption expenditure data from the NSSO survey showed that consumption growth for nearly a decade is running at about 3.5% annually which is half the GDP growth. Economists are unable to explain this phenomenon where consumption growth is running at half the level of GDP or income growth. If this is true then savings should see a robust increase. But household savings are also shrinking! Some reputed economists have said the only answer to this apparent contradiction is that GDP growth may be exaggerated.
At a more structural level, the Indian middle-class income and consumption stagnation needs to be studied more closely. As per the data generated by the American Pew Research Centre India’s middle-class was roughly 50 million to 70 million in 2010 and this grew to 150 million to 200 million by 2020.
Pew also conducted research in 2017 to assess the size of the middle-class in India and China for an income range of $10 -$50 a day on a Purchase Power Parity (PPP) basis. As per this criterion Indian middle-class was at 108 million in 2016 whereas China’s middle-class was 707 million strong. More pertinently, 61% of the Chinese population lived on more than $10 a day and only 3% of Indians lived on $10 plus a day.
China’s middle class has grown far more rapidly than India’s. One data point which truly exemplifies this is how the tax to GDP ratio in China went up from roughly 14% of GDP in 2000 to 23% of GDP in 2020. In India, tax to GDP ratio has remained roughly in the range of 15% to 18% during this entire period. This is clearly another sign that India’s middle-class size is not growing at the desired pace. And in recent years it has experienced severe stagnation, which reflects in the shrinkage of incomes and savings. The official narrative pretends to be oblivious of such deeper problems and continues to be in self-congratulatory mode, citing how India remains the fastest growing economy in the world. No one is asking how this growth is getting distributed. This is the sad reality.
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.
