Middle class facing a massive squeeze

Aunindyo Chakravarty

Senior Economic Analyst

I grew up in a middle-class South Delhi colony in the 1970s and 1980s. We lived in a single-storey rented house with a small garden, shaded by a mango tree. There was space for a car to be parked, but we had none. Inside, the décor was limited to a few framed prints and tons of books. In the living room, there was an old sofa, a divan that doubled up as a bed for guests, and a second-hand dining table, bought from a family friend who needed money to fund his trip to England.

The only car in our larger family belonged to my mother’s elder brother, a well-respected doctor who had made money working in the West. For entertainment, we had a record player and a big transistor radio, on which we heard the news. There was a cinema hall close by, where we went to watch old Hollywood movies a couple of times a month. Clothes were bought twice a year, during festivals. Birthday gifts were almost always books.

As children, my sister and I used to play with kids who lived next door. They were relatively rich, and had air conditioners in their rooms. Their living room was modelled on what Hindi cinema homes looked like. Red sofas, plush carpets and garish paint on the walls. Yet, we never envied them nor felt any need to emulate their lives.

That was how the middle class lived. That was what we aspired to. We knew that the rich lived a more comfortable life, but we were also very aware that they lacked social capital. More importantly, consumer goods were few and far between. So, the rich had very little to flaunt or parade their wealth. If anyone did, they were immediately labelled as ‘smugglers’!

In fact, throughout the 1970s, the gap between the rich and the middle class narrowed dramatically. For instance, in 1972, the year I was born, the richest 10 per cent of Indians earned 35 per cent of our national income, while the next 30 per cent — the middle class — earned another 36 per cent. By 1982, the share of the top 10 per cent had dropped to 31 per cent, while that of the ‘middle class’ had risen to 39 per cent. In terms of average income, the richest 10 per cent actually saw their pre-tax earnings drop by 0.4 per cent per year in this 10-year period, while that of the middle class increased at an annual rate of 1.7 per cent.

The year 1982 was a turning point. That was the year when Suzuki beat rival Daihatsu to get to tie up with Maruti Udyog Limited to launch India’s first ‘people’s car’. It was also the year when New Delhi got spruced up for Asiad-82 and Doordarshan began broadcasting in colour. During that year, more than one lakh colour TV sets were imported at a 190 per cent import duty. New fashion brands took advantage of the rise of middle-class consumerism to expand across the metros. The most prominent amongst them was Intercraft, whose brand F.U’s (Fit You Superbly) became a huge success, before global brands like Benetton and Levi’s entered India.

These were not arbitrary changes. Indira Gandhi’s second coming involved a major policy shift towards market-based reforms and encouraging the private sector. They came right after India took an IMF loan, and were bundled together in a policy project called Operation Forward. Rajiv Gandhi opened things up even more, removing state monopolies in many sectors, diluting regulation of big business and liberalising exports and imports.

The economic reforms in the 1980s helped the middle class improve their living standards. Between 1982 and 1991 — the year of the Rao-Manmohan reforms — middle-class incomes increased at an annual rate of 2.2 per cent. But it was the richest 10 per cent who were the biggest gainers — their income rose at 4 per cent per year. This was a complete reversal of what happened in the 1970s. In terms of share of national income too, the rich gained, moving from 31 per cent in 1982 to 35 per cent in 1991. On the other side, the middle class’ share dropped to 37 per cent from 39 per cent.

Since then, this gap has only widened. By 2014, the share of the richest 10 per cent increased to 57 per cent, while that of the next 30 per cent of earners dropped to less than 25 per cent. In terms of annual growth in earnings, that of the top 10 per cent has grown at 5.4 per cent per year since 1991, while that of the middle class has grown at a staid 2.4 per cent.

Anecdotal evidence tells us that the middle class is now facing a massive squeeze. Three indicators show this. The first is the sale of fast-moving consumer goods (FMCGs). The profits of companies which cater to middle-class consumers — Hindustan Unilever Limited and Tata Consumer — have contracted, while Nestle India, which sells to the more affluent, has risen sharply.

The second key indicator is car sales; in 2023-24, cheaper compact cars sold 30 per cent less than in 2018-19. On the other side, more expensive multi-utility vehicle sales rose by 167 per cent. The third indicator of this sharp divergence between the consumption of the middle class and the affluent is home sales. Affordable homes have seen a drop in sales in the first three months of 2024, while the sale of premium homes has shot up.

White-collar jobs, which form the foundation of the middle class, have steadily declined over the past few years. The number of ‘white-collar’ vacancies in January this year was 24 per cent less than those of last year, and 35 per cent less compared to January 2022. At the same time, retail inflation has eaten into real incomes.

The living standards of the middle class have either worsened or remained stagnant for more than a decade. Educated middle-class youth entering the job market are reconciling to earning less than their parents did. It is a class that is neither benefiting from the K-shaped recovery nor from the government’s welfare schemes.

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