Urban slowdown: What happened to the Great Indian Middle Class?

Ghiyasuddin’s life was a revved-up version of the classic rags-to-riches tale. He started off as a menial servant at a merchant’s house, spent a considerable time in Delhi looking for a job, before managing to find employment in the royal army, where he steadily rose through the ranks and eventually became powerful enough to dislodge the squabbling heirs of the sultan.

Of course, this fairytale life was also accompanied by immense brutality, casual bigotry and other assorted virtues characteristic of medieval kings, but what set him apart from most of his peers was his administrative stance.

Having risen from the common people, Ghiyasuddin was acutely aware of their problems. But more importantly, he sympathized with them. His policymaking sought to strike a fine balance between the state’s interests and the masses’ welfare.

For instance, he not only substantially reduced the tax burden imposed by the previous sultan but also remitted taxes during years of drought, while simultaneously undertaking infrastructural projects like digging more irrigation canals and building forts in the countryside to shore up security.

He also issued an astonishingly modernist macroeconomic edict. Excessive taxation and the exorbitant demands of kings can be detrimental to progress, Ghiyasuddin told his revenue officers.

Perhaps there is no group among which this message would resonate more strongly at the moment than India’s middle class.

Corporate Cues

If there was one theme running through the just concluded Q2 earnings season, it was that urban India is showing signs of distress.

India’s biggest fast-moving consumer goods (FMCG) firm Hindustan Unilever, considered a proxy for the domestic consumption story, reported a 3.86% year-on-year (y-o-y) dip in the September-quarter profit at ₹2,612 crore, while underlying volume growth stood at 3%, lower than analyst estimates of 4-5%, weighed by flagging growth in urban markets.

“Urban growth has trended downward, especially in the larger cities, which have been the engine of FMCG growth for some time. We have observed a slowdown across channels and segments," the company’s chief executive officer (CEO) and managing director (MD) Rohit Jawa said.

Its peer, Nestle India, too, posted lacklustre numbers, with a sharp deceleration in revenue growth at just 1%, while volumes declined marginally y-o-y.

The firm’s chairman and MD, Suresh Narayanan, attributed the slowdown to a “shrinking" middle class, which traditionally has been the growth engine of FMCG companies.

“The market is facing muted demand. It’s extremely clear. The growth in the food and beverages sector, which used to be double digits a couple of quarters ago, is now down to 1.5% to 2%," Narayanan told reporters last month. “Tier-I and below towns seem to be reasonably stable as far as we are concerned, rural is really reasonably stable, the pressure points are coming from mega cities and metros," he added.

The sentiment was echoed by other FMCG companies as well.

Tata Consumer Products called out “softness" in urban demand, while cigarettes-to-hotels conglomerate ITC mentioned that high frequency indicators such as automobile sales, bank credit & personal loan growth, credit card transaction volumes, GST collections, merchandise exports growth and manufacturing PMI pointed to a deceleration in the pace of economic activity during the quarter.

“The quarter also witnessed excessive rains in August and September and a resurgence in food inflation which led to CPI hitting a 9-month high. The combination of these factors, along with inflationary trends in commodity prices, weighed on consumption expenditure and the FMCG sector," it added.

Urban India accounts for around two-thirds of the FMCG sector’s overall sales, and thus, any slowdown in this segment sends alarm bells ringing across corporate headquarters.

“The weak Q2 performance reported by key urban-focused consumption companies reflects larger macroeconomic trends rather than isolated, company-specific issues. Urban demand has slowed considerably due to persistent high food inflation, which reached nearly 11% in September 2024, coupled with elevated interest rates and shifting consumer behaviour. Increased prices for staples have led to cautiousness in discretionary spending, particularly in the FMCG sector," Naveen Malpani, partner and consumer industry leader at Grant Thornton Bharat, told Mint.

It is not as if the slowdown is limited to consumer staples.

The country’s largest carmaker Maruti Suzuki, which clocked flat revenue growth of 0.4% y-o-y at ₹37,203 crore, saw rural sales grow by around 8% during the first half of the financial year, while the urban market declined by 2%.

The trend was reflected in recent data from the Federation of Automobile Dealers Associations (Fada), which shows auto sales in urban areas declining 2.7% month-on-month and 1.5% year-on-year in October, while the rural market registered growth.

From cement manufacturers and paints companies to alcohol makers and quick service restaurant operators, the message was loud and clear this results season—one of the main engines of the ‘India Story’ is sputtering.

Blood, Sweat and Tears

Owning a car and a house is considered the ultimate dream of the Great Indian Middle Class. On both fronts, the dream is slipping away from a vast swathe of consumers.

Purchasing a car in India is enough to give one the financial equivalent of a post-traumatic stress disorder. When the government earns more in taxes than what the car manufacturer makes per vehicle (taxes and cess could be around 30% for cars, while manufacturers’ Ebitda margins hover near 10%), it is a clear sign that the system has gone haywire.

Even if you ignore the one-time hit to your finances, paying over 50% taxes per litre of petrol at a time when global crude oil prices are ruling at a benign $70 a barrel is a bitter pill to swallow. The government has mandated mixing ethanol with petrol, and yet there is no sign of pump rates being eased.

As for housing, the less said the better. Real estate pricing, especially in tier-I cities, has assumed a stark ‘Après moi, le déluge’ tone. Rates of some apartments in Gurugram and Mumbai would have made Louis XIV blush.

This is something corporate India is acutely aware of as well.

“...if you were to look at the CPI basket weight for rural and urban, one thing that comes through very clearly is the housing cost. The housing cost in urban and especially in metro areas is about 22% of the total CPI basket weight. And we know that real estate is— the prices have gone up, the rentals have gone up, and that’s creating stress for most consumers in large cities and metros," Britannia Industries’ VC and MD Varun Berry said at the company’s results call.

This is not including other overhead costs like education and medical expenditure, which too have ballooned to swoon-inducing proportions, especially in metros.

“Rising prices are eating into disposable income, making people more cautious with their spending. Higher costs for basics like rent and utilities are cutting into budgets for non-essentials," Chethan Shenoy, director and head, product & research, Anand Rathi Wealth, told Mint.

Slower government spending on infrastructure and public projects too has contributed to subdued economic activity, indirectly impacting consumption, he added.

Malcolm in the Middle

The term ‘middle class’ in India is a pretty broad church. The writer of this article, the reader of this article and the newspaper delivery man (or the guy who installed the internet connection at your home)—all consider themselves to be middle class.

In a recent YouGov-Mint-CPR Millennial Survey, over 88% of urban Indians described themselves as ‘middle-class’. The feeling transcends income disparities—among those earning less than ₹50,000 a month, 90% said they were middle-class, but so did 57% of those earning over ₹4 lakh a month.

In such a wildly heterogeneous field, the term ‘middle class’ itself loses meaning. Is there a better framework to understand this middle India?

Blume Ventures, an early-stage venture fund, has popularized a framework originally developed by Kishore Biyani which demarcates India’s consumers into three segments – India 1, 2 and 3.

The first tier, comprising around 30 million households (or 120 million people), has a per capita income of $15,000 per person (around ₹12.3 lakh) and forms the country’s consuming class.

Below them are the ‘aspirant class’ —300 million people with a per capita income of $3,000 (around ₹2.5 lakh).

At the bottom of the pyramid is the vast majority of India’s population which does not have the disposable incomes currently to warrant any interest from venture capital funds.

It is the divergent consumption patterns of India 1 and 2 which is showing up in India Inc’s quarterly results.

India 1 is a proud denizen of the “experiential economy". It also places a premium on convenience. The traffic nightmare of cities has made him/her rely on Uber and Ola rather than become a car owner and wreck one’s nervous system hunting for a parking spot. Trips to Europe and South Asia are preferred over the sky-high hotel rates and overcrowded beaches of Goa. For consumption, niche “artisanal" D2C brands are in vogue over mass-marketed FMCG products. Most of these expenditures are not captured in the results of listed consumer companies in India.

At the same time, lingering effects of inflation and taxation is making India 2 and 3 cut down on non-essential spending and switch to local brands—translating into headwinds for the HULs and the Marutis of India.

In other words, a K-shaped recovery is underway in India, where India 1 is seeking premium goods and services, while India 2 and 3 are curtailing spending on entry-level products.

But expenditure is just one side of the equation. What about income?

Unfortunately, there is little cheer on that front as well.

As per the latest Periodic Labour Force Survey (PLFS), real wages of workers have increased at only 0.7% per year between 2017-18 and 2022-23. It is higher at 1.7% for rural areas, but just 0.1% for urban areas. In fact, urban wage workers have seen their real earnings decline 0.5% per year since 2011-12.

The same trend is corroborated in the finance ministry’s monthly economic report for September.

“Contrary to rural demand, there has been evidence of a slowdown in urban demand as reflected in the performance of various indicators during H1 (first half) of FY25. Volume growth in urban FMCG sales has moderated from 10.1% in Q1 of FY24 to 2.8% in Q1 of FY25," it noted.

Mera Gaon, Mera Desh

How should investors approach the current situation? Avoiding the entire consumption pack is neither feasible nor recommended, but identifying pockets of opportunity is crucial, experts say.

“While urban-focused consumption sectors face headwinds, rural markets have shown resilience, with some FMCG companies reporting stronger growth in rural areas compared to urban centers. For example, Dabur India’s rural business outpaced urban growth by 130 basis points in Q2. Investing in companies with a strong rural presence or those offering essential goods less sensitive to economic cycles could provide value," Sonam Srivastava, founder and fund manager at Wright Research PMS, told Mint.

Rural is clearly the flavour of the season for other experts as well.

“A distinct urban-rural divide has emerged. While rural markets are witnessing a steady recovery with robust growth in traditional trade, urban consumption has contracted, particularly in discretionary categories," Grant Thornton Bharat’s Malpani noted.

Rural markets are well supported by government initiatives (such as MGNREGA and increased subsidies), good rainfall and steady agricultural output, he added.

This has ramifications for other sectors too.

“In the auto sector, instead of original equipment manufacturers (OEMs), investors can consider auto component makers which could benefit from improving two-wheeler demand and vehicle upgrades," Anand Rathi Wealth’s Shenoy said.

Ferreting out an investing opportunity in the midst of a cost-of-living crisis facing millions might not be the most redeeming feature of modern capitalism, but as most middle-class Indians know too well, morality is currently not an inflation-beating asset.