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India in a sweet spot, rising middle class will power growth over the long haul

India's vibrant middle class on the driver's seat (Image Courtesy: MEA-https://indbiz.gov.in/trade/)

India is in a sweet spot as its rapidly growing middle class fuels domestic consumption amid rising global challenges and economic uncertainty. Importantly, the trend, for India, is likely to continue. A report released by People Research on India’s Consumer Economy (PRICE) and India’s Citizen Environment, earlier this year, noted that the size of India’s middle class will nearly double to 61 per cent of its total population by 2047 — when India celebrates its 100 years of independence — up from 31 per cent in 2020-21.

Most researches indicate that India’s growth story will be driven by the increase in middle class consumption in both urban and rural areas. According to a Brooking report, India’s consumer class growth will be among young people while China will predominantly add consumers above the age of 45. By 2030, India will be home to 357 million young consumers below 30 years, the largest “young consumer market” in the world, it said.

“Middle-class aspirations for upward mobility resonate with broader goals of a developing nation like India,” Amitabh Kant, India’s G-20 sherpa and former CEO of Niti Aayog, said earlier.

Last week the State Bank of India (SBI) published a report highlighting the expansion of the middle class in the country. The report is based on India’s income tax returns (ITR). The total income tax returns filed during assessment year (AY) 2022-23 increased to 78 million from 73 million in the previous year. Interestingly, of these, total 58 million — 75 per cent of the returns were filed on or before the due date, the SBI said, adding that with the increasing number of returns filed every year, the share of returns filed after due date has also declined from a high of 60 per cent in AY 2019-20 to merely 25 in AY 2022-23.

The report highlighted that in terms of percentage growth, smaller states such as Manipur, Mizoram and Nagaland in the northeast have also registered more than 20 per cent increase in ITR filed during the last nine years.

It also pointed out that the weighted mean income of Rs 4.4 lakh in AY 2013-14 (basis ITR returns) increased to Rs 13 lakh in FY 2022-23. States such as Uttar Pradesh and Bihar once considered “bimaru” have reported a spike in ITRs too.

In June 2014, UP recorded a modest 1.65 lakh ITR filings, but by June 2023, this figure had skyrocketed to an impressive 11.92 lakh. Similarly, Bihar, which recorded just 50,793 ITR filings in June 2014, experienced an extraordinary upswing, reaching an astonishing 4.71 lakh filings by June 2023.

“I firmly believe that when the country will celebrate 100 years of freedom in 2047, the country would be a developed India. I say this on the basis of the capability of my country and available resources,” Prime Minister Narendra Modi said while delivering his Independence Day speech last week.

“India gets a lot of its GDP from domestic consumption. So even if the world would slowdown for a few months, India has a natural cushion by the fact that it is more domestic consumption oriented,” World Bank President Ajay Banga said earlier.

Banga earlier said that he is “more optimistic about India today as a whole” than he has been in a long time.

Middle Class in India and China

Though India and China together are home to about 60 per cent of the world’s middle-class cohort, the slowdown in economic growth for the dragon has started to dent its consumption.

Hong Kong based South China Morning Post in a recent article said that the middle class in China is bearing the brunt of the nation’s economic changes, which is a cause for concern. “The typical middle-class lifestyle, which includes buying a nice flat by taking out a big mortgage, and sending children to expensive private schools, has quickly become unachievable as a wave of job cuts hit urban families.,” it said, adding that the fall in high-paying private sector jobs has also burned the social ladder for many families who were on their way to becoming part of the middle class.

The steady rise in India’s middle class has caught the attention of global investors and multinational companies.

A large number of companies are either looking to expand their existing operations in India or looking to make a foray into the market. The growth in population—India has now beaten China to become the world’s most populated country—offers a ready labour pool to companies as well.

The Japan External Trade Organisation (JETRO) in December revealed that more than 72 per cent of the Japanese companies were keen to expand their operations in India. For China, the number was small at only 33.4 per cent.

“Modiji’s focus on self reliance will go a long way in boosting the overall economy. India was the number one country to recover from the Covid impact. It was the fastest to recover from the Covid impact and normalise its economy. If you see today, its consumption pattern is back to normal,” Takashi Suzuki, Chief Director General (South Asia), JETRO told India Narrative.

However, challenges remain

While India has undertaken a host of reforms to boost investments, a lot more needs to be done in terms of labour and land acquisition to promote ease of doing business and provide stability and policy certainty. Several states have archaic labour and land laws. That needs to be changed.

“It also needs to avoid the mistakes China made,” an analyst with a research organisation said.

The over emphasis on exports and real estate segment has created problems for China, which has also resorted to expanded lending through shadow banking. Beijing’s sudden crackdown on its private sector added to the problems.

Though it is ‘Advantage India’ fuelled by its rapidly growing middle class, it needs to play its cards well and remain cautious.

Also read: Why is China not publishing unemployment data, despite risking global investments?