The rise of the Indian middle class

From driving economic growth to reshaping political discourse, this segment has the potential to emerge as a powerful catalyst for change.

India is the world’s fastest-growing large economy, with its middle class expanding rapidly, driving economic and political change. The number of registered car users has increased dramatically in India, reaching an estimated 40 million, suggesting a middle class of around 400–500 million people. This demographic is the fastest-growing segment of the population, and it has outpaced the growth rate of the global middle class.

India’s middle class has many unique features. It is the youngest globally, which typically translates to greater dynamism economically and politically compared to counterparts in China and the United States. It is also a driving force behind the rising domestic market, with growth in the purchase of homes, cars, refrigerators, motorcycles, and digital goods and services. 

India and China have both been recognised for rapid economic growth and the rise of the middle class. But the rise of the middle class in India is associated with different growth drivers. Unlike China, which has a global reputation for exporting manufactured goods, India has benefited from a service revolution. India’s IT outsourcing industry is still considered one of the largest exporters of IT and business process outsourcing services. It has been on an increasing growth curve for the past several decades. India’s growth pattern in the 21st century is remarkable because it contradicts a seemingly iron law of development that has held true for almost two centuries since the start of the Industrial Revolution.

Technological advancements in Internet access, cloud computing, and state-of-the-art data centres have significantly contributed to propelling India’s middle class into prominence in the global technology landscape. Major firms — such as Apple, Microsoft, and Meta — have experienced revenue growth rates in India that have outpaced their global growth rates. India will continue to have a thriving startup ecosystem that ranks third globally. India’s ranking in the Global Innovation Index has also surged from 81 to an impressive 40th position during the last decade.

The rise of the middle class in India is associated with more inclusive growth, as its growth is not concentrated but spatially dispersed across India. Unlike in China, where the middle class is concentrated in urban areas, India’s middle class has also increased in rural areas. A wider spatial dispersion of the middle class has improved the allocation of resources — labour, capital, and energy — across both urban and rural areas. This has reduced disparities and inequalities in spatial development between urban and rural areas, leading and lagging regions, and north and south. India has experienced a much faster pace of increase in the size of the middle class in the lagging regions, especially in Uttar Pradesh and West Bengal.

Has India’s structural transformation and growth improved with the rise of the middle class? India’s structural transformation is taking place at a much faster pace compared to developed countries. India’s middle class and growth centres have dispersed from urban to rural areas. India’s manufacturing sector is rapidly de-urbanising, and this has improved the allocation of enterprises and resources between urban and rural settings. The de-urbanisation of the manufacturing sector has improved the allocation of labour, capital, and land in recent years. 

India’s middle class has a long history, which can be traced back to the 19th century under British colonial rule. The middle class played an important role in India’s struggle for independence from colonial rule. Looking ahead, the rise of the middle class is poised to bolster political influence, cause a decline in old forms of social and political affiliations, and reduce religious, language, and class conflict to make India more liberal and egalitarian.

The middle-income trap

However, there are rising concerns that India’s miracle growth may soon face a middle-income trap, akin to experiences in other middle-income countries in East Asia, which will stall future growth. Several fast-growing developing countries have faced a middle-income trap. Most East Asian economies got squeezed between other low-wage producers and better developed countries with highly skilled people. Caught between these two groups, many middle-income countries are left without a viable high-growth strategy. The risk of falling into the trap is higher in developing countries that lack the innovation capabilities to enable the economy to shift production to higher-value goods or services.

Can India avoid the middle-income trap? It can if it can focus on accelerating structural reforms to improve productivity. It needs to sharpen its focus on stronger education and adopt an innovation-focused growth strategy with policies to escape the middle-income trap. This is the lesson that India can learn from South Korea, where education and innovation played a key role in avoiding the middle-income trap.

India is at a point in its structural transformation where the rise of a young middle class can go hand in hand with a faster pace of structural transformation. India can continue to benefit from its demographic dividend, provided investments in education and skills are scaled up. India’s middle class is supportive of education, as their children attend private schools or receive private coaching to supplement their education. Increased emphasis on education, particularly higher education, will avoid a middle-income tarp.

The middle class has also become more conscious of quality of life and environmental concerns, like severe air or water pollution. There are growing pressure groups of middle-class voters that have the potential to shape political discourse, forcing political parties to come clean about their stand on quality of life and environmental issues. This time, elections in India may be fought over quality of life, environmental issues, and the establishment of strong institutions to sustain economic and social development in the long term.

(The writer has worked for the World Bank and taught economics at Oxford University)