The Great Middle Class Hope

One of the parlor games analysts play in assessing the trajectories of China and India is arguing about the size, purchasing power and growth potential of their respective middle classes.  Obviously, each nation’s long-term prosperity turns in important ways on this question.  But the issue also has significant political implications.  For China, many assume that a rising middle class will eventually be the engine of democratic reform. 

In India’s case, a burgeoning middle class is supposed to be the catalyst for much-needed reforms of state governance.  The notion is that as the middle class gains economic command and political weight, it will demand better delivery of public services in such vital areas as infrastructure and education.  As one Indian journalist argues, “The middle class now knows that if it gets angry, someone will sit up and take notice.”  (Also read this recent opinion piece .)

It’s a nice theory and it may even prove true.  But it does raise the prior questions of how large and wealthy the Indian middle class really is, and what its profile will look like in the future.  Most agree that the middle class is the country’s fastest growing population segment, but beyond that no consensus exists.  Last month, for instance, a New Zealand columnist pegged the Indian middle class at 400 million people, while many others (such as this recent New York Times article or this Wikipedia entry) put the figure at 300 million.  A British investment advisor in an CNBC interview earlier this year estimated that the number was 170 million, while others advance even lower estimates.  Of course, it also doesn’t help that there is no standard definition of what constitutes middle class status in India, nor agreement on how to measure it.

Two new publications – one by the National Council of Applied Economic Research (NCAER) in New Delhi and the other by the Asian Development Bank (ADB) – put these issues into strong profile.  According to How India Earns, Spends and Saves, a book by NCAER senior fellow Rajesh Shukla, the number of middle-income households (defined as those with annual income of $1,000 and $4,000) increased from 109.2 million in 2001/02 to 140.7 million in 2009/10, or about 62 percent of the country’s 228.4 million households.  However, using World Bank criteria of between $4,500 and $22,000 in annual income sharply reduces the number of middle class households Shukla arrives at, from about 11 million in 2001/02 to about 29 million (or about 150 million people or 13 percent of the population) at the end of the decade.

The ADB report concludes that, in absolute terms, India has the second largest middle class in Asia, following China.  Defining the middle class as having daily consumption expenditures of $2-$20 per person as measured in 2005 U.S. dollars on a purchasing power parity basis, it estimates that the middle class in India numbered about 274 million people in 2005 (or about a quarter of the country’s population).  It forecasts this number to grow to over 600 million by 2020, and to over 1 billion by 2030 – at which point, the middle class in India will outnumber that in China.  But the ADB also reports that over 80 percent of the middle class in India falls in the $2-$4 daily consumption bracket and thus is vulnerable to slipping back into poverty in the event of a major economic shock. 

Other recent studies have likewise produced varying numbers.  A 2007 report by the McKinsey Global Institute found that 13 million households (some 50 million people or approximately 5 percent of the population) had reached middle class status by 2005, defined as having real annual household disposable income between  200,000 and 1 million rupees.  But it estimated that the middle class would swell to over ten times in the coming decades, to 583 million people (41 percent of the population) by 2025.

A 2007 CNN-IBN survey reckoned that slightly over 200 million people (or 20.2 percent of the population) were then in the middle class.  It defined this status as anyone who owned a motor vehicle (a two- or four-wheeler) or a color television or a telephone.  A 2009 World Bank study estimated that the middle class population stood at 264 million people in 2005.  Its criterion was $2 – $13 in daily earnings.

And a noted American economist, Nancy Birdsall, has even suggested that India is actually missing a middle class, since most of the people usually viewed in that category are really among the most affluent in the country.  (Read the Times of India comment here.)

However defined, will the Indian middle class be the harbinger of change that so many assume?  Here, too, agreement is elusive.  The CNN-IBN survey found that a majority of the middle class is simply not interested in politics, though a Deutsche Bank report released earlier this year notes that the evidence on this point remains vague and largely anecdotal. 

The ADB report argues that the expansion of the middle class will bring about political demands for improved public services.  But Birdsall points out that virtually all urban households with apparent middle-class status in India are comprised of workers whose income is directly or indirectly dependent on government, whether as civil servants or workers for parastatals or for institutions (such as banks and natural resource producers) highly dependent on public policies.  Given this, she argues that the political challenge in creating and maintaining accountable government will be daunting.

The bottom line is that skepticism is in order whenever casual estimates about the scope and impact of the middle class are thrown about.  The transition from aam aadmi to bourgeoisie is certainly underway in India, though its exact contours, particularly in the political arena, remain debatable and subject to continual examination.