Opinion

The shrinking middle-class

| Updated on: Dec 06, 2021

NEW DELHI , 29/04/2021: Migrant workers seen with their belongings on their way back to their hometown in Bihar following the lockdown due to spike in covid 19 cases, in New Delhi on Friday .Photo: SUSHIL KUMAR VERMA / The Hindu | Photo Credit: SUSHIL KUMAR VERMA

The dynamic class has been hit by the ‘pandemic’ blow

The second wave of Covid-19 has left an indelible mark on India’s self-image and public confidence. People are gasping even for an ounce of oxygen, while a bleak future stares at them.

According to a Pew Research Centre report, India’s middle-class population shrunk by at least 32 million with 75 million people driven below the poverty line in 2020. India contributed 60 per cent to the worldwide drop in the middle-class population. This will surely impact India’s already slowing economy.

Since 1990, the 20-fold rise in the middle group has set the tone of Indian economic growth. The middle-class makes up 28 per cent of the total population and 79 per cent of the total taxpayer base. It also contributes 70 per cent to the total consumer spending. It actively participates in the real estate and equity markets and promotes innovation.

However, the Covid crisis has caused a tectonic shift in the functioning of the economy. Priority consumer spending during the pandemic was a boon for the IT and pharma sectors, however, it devastated most labour intensive and consumer discretionary product industries, which together employ 30 per cent of the total population and majority of the lower middle-class.

Job threat

To make matters worse, 81 per cent of the workforce in these industries are informal in nature with little job security. At least 10 million migrant workers, majority belonging to the lower middle-class, were forced to go back to farming. Remittances, a major support for Indians, fell sharply by 9 per cent in 2020 owing to the overseas job losses.

In the Global Hunger Index 2020, India’s rank fell to 102from 94 in 2019. Rising petrol prices and 9 per cent plus food inflation has forced the middle-class (and the poor) to dip deeper into their savings. Indebtedness among Indians has increased and what’s more 81 per cent of them rely on informal lenders.

India is in danger of falling into the ‘middle-income trap’ wherein the poor won’t be able to move up the ladder over the years.

The income disparity is set to get wider. In India the top 1 per cent hold as much wealth as bottom 50 per cent.

With the central bank pumping in more liquidity, the ultra-rich and upper class, with access to cheap credit, took advantage of the bull run in the stock market, increasing their wealth by 35 per cent in one year. In contrast, the low-income earners, who are risk-averse, put their savings in bank deposits. This is evident from the fact that deposits increased by 11.4 per cent in FY21, despite a 100bps fall in interest rates.

Female job loss rates were 1.8 times higher than those of male, worsening the already wide gender disparities.

The pandemic has also worsened the digital divide impacting the education of children from the poorer sections of society. Lack of internet and smartphone access has led to increase in school dropouts.

While a wealth tax may not be the best solution, an effective income distribution system needs to be implemented to support the shrinking group. Greater emphasis to manufacturing, advance farming techniques and ease of doing “small and micro” business, which directly employs 33 per cent of the total population, will help in growth revival.

Women entrepreneurship must be promoted in the start-up realm. In this pandemic world, skill matching, quality education and health services needs to be accessible to all to promote a democratic future.

The middle class has been the financial backbone in every crisis, pulling up the nation from the brink. It’s time the government provides ‘the providers’. As Raghuram Rajan rightly said, “Make sure that a temporary shock does not become more permanent shock”.

Mehta is a consultant and columnist and Goel is a financial researcher

Published on May 19, 2021
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