Inclusive Growth

Transforming Middle India: Inclusive Growth as the Path to Success

In a new report, the Center’s Chief Economist, Yuwa Hedrick-Wong, builds a case for why the success of India’s economic takeoff depends on transforming “Middle India,” the middle 60% of households by income, into a thriving and increasingly prosperous middle class.

Transforming Middle India: Inclusive Growth as the Path to Success

August 14, 2016

Read the executive summary:

The sustainability and eventual success of India’s economic takeoff will depend on an expanding and increasingly prosperous middle class. However, what is commonly referred as the “middle class” in India has nothing to do with Middle India, the households located in the middle 60% of the income spectrum. In her meticulous and ground-breaking research, Rama Bijapurkar has ascertained that the so-called middle class households are located between the 78th and 98th percentiles by household income. In other words, they are actually the upper class of India.

Middle India has been neglected in the last two decades after India’s first wave of economic reforms of the 1990s. If Middle India continues to be left behind, then domestic demand is unlikely to be strong enough to help drive India’s growth acceleration. Middle India is therefore critical to India’s economic takeoff.

Transforming Middle India into the nation’s genuine middle class would fundamentally support the government’s ambitious efforts to increase GDP growth rates to the 8-10% range. With faster growth in household income in Middle India, domestic demand would become stronger more quickly. This in turn would open up new opportunities for more productive business investment targeting the domestic market, including opportunities for small businesses and start-ups. A virtuous circle can then be set in motion.

This report assesses the prospects of transforming Middle India into the middle class of India using detailed household income and expenditure survey data produced by R. Bijapurkar, R. Shukla, and others in 2014 in the research report Middle India: Key to Inclusive Growth and a Prosperous Future India, published by People Research on India’s Consumer Economy (PRICE). Deploying these data, three sharply contrasting pictures of Poor, Middle, and Rich Indias can be drawn in terms of income, education, employment, and other socio-economic characteristics. However, all three Indias also face many common difficulties such as having to cope with a debilitating lack of basic infrastructure and scarcity of formal employment. For example, even for households in Rich India (those located in the top quintile of household income), only 38% of them are paid a regular salary by their employers; that drops to 17% in Middle India and 8% in Poor India.

Source: People Research on India’s Consumer Economy

In terms of financial inclusion, significant progress has been made under the government’s Pradhan Mantri Jan Dhan Yojana (PMJDY) program that aims to open a bank account for every household in India. The challenge is that many of the newly opened bank accounts have remained inactive. For example, while practically all Middle Indian households now have bank accounts, only 12.7% of them have succeeded in securing some form of a bank loan. Only material improvement in the socioeconomic conditions of Middle India will enable more of its households to reach the income threshold for becoming profitable customers for the banks.

In spite of the myriad challenges facing Middle India, however, survey data also reveal a healthy level of confidence in India generally, and Middle India in particular. Under the right conditions, Indians’ “animal spirits,” which have been dormant until now, could be ignited.

Click here for the full report or check out this infographic.