Can India keep its wealthy from fleeing?

Foreign investors were net sellers of India-listed shares last month, accounting for more than $1 billion in outflows. Foreign inflows of $2.6 billion this year are a fraction of last year’s $22 billion. Yet the Bombay Stock Exchange’s benchmark BSE Sensex has risen 12.8% year to date, buoyed in large part by domestic mutual funds.

The stock market’s resilience reflects deeper changes in India, with implications beyond investor portfolios. Long a global byword for poverty, India now boasts a significant and rapidly growing cohort of relatively wealthy consumers and investors. Goldman Sachs estimates the country’s “affluent population"—those with an annual income of at least $10,000—will grow from approximately 60 million today to 100 million by 2027. Blume Ventures, an early-stage Indian venture fund, estimates that about 30 million households, or roughly 120 million people, with an annual per capita income equivalent to $15,000 represent “the consuming class."

These are the people largely responsible for India’s stock-market boom, as well as for the majority of domestic spending on everything from beauty products and restaurant meals to airline tickets and iPhones. In historical terms they are an anomaly. India has long been characterized by extreme wealth disparities—the old cliché of maharajas and snake charmers—but it has never had a well-off class this large. Goldman Sachs estimates that as recently as 2011 only about 20 million Indians met its criteria for “affluent."

Despite this progress, the country’s consuming class remains small. Blume estimates it at about 8% of the population. It reports that only about 25 million to 30 million households own a car. Some 30 million homes, according to Blume, have wired broadband. Among all U.S. households in 2021, 90% had a broadband internet subscription.

At the higher end, India’s market nearly vanishes. According to Mercedes Benz’s 2023 annual report, it sold about 737,000 cars in China and 298,000 in the U.S. In the 2023-24 financial year, it reportedly sold some 18,000 in India. For BMW the Indian market is less than 2% of the Chinese. India houses nearly one-sixth of the world’s population but reportedly accounts for roughly 4.4% of Netflix’s 270 million paid subscribers.

According to Blume, only 22 million Indians paid income tax last year. Of them 4.5 million—or 0.3% of the population—accounted for 80% of collected income taxes. By contrast, the top 1% of Americans in 2021 paid 45.8% of total income taxes.

Blume reports that groceries accounted for three-quarters of retail spending in India in 2022, compared with 40% in China and 30% in the U.S. Most Indians lack the disposable income to buy most consumer goods, let alone invest in the stock market. The roughly 40 million Indians invested in mutual funds, according to Blume, represent less than 3% of the country’s population. More than 800 million Indians are entitled to free grains from the government every month, and as many as 900 million have received direct cash benefits in the past decade.

How India approaches its growing bubbles of affluence will determine its future. For the past century, dating to the final decades of colonial rule, Indian politics and public discourse have been dominated by leftists quick to demonize wealth. Since the demise of the Swatantra Party in 1974 no Indian party has espoused economic liberalism. The economic reforms of the 1990s occurred because India was broke, not because its political class suddenly embraced free enterprise.

Because nonpoor Indians have almost no ability to affect electoral outcomes, they have largely “seceded" from the public sphere, Sajith Pai, a partner with Blume Ventures, says in an interview. Many of those who can have left: According to Henley & Partners, a firm that helps the wealthy acquire foreign residency, 7,500 millionaires exited India in 2022.

Even today, no Indian politician can bring himself to lament that a tiny part of the population shoulders a disproportionate amount of the tax burden and receives few government services in return. The promise of radical wealth redistribution lies at the heart of opposition leader Rahul Gandhi’s attempted political comeback. Mr. Modi’s popularity relies largely on a mix of religious chauvinism and handouts for the masses.

For the U.S., and the West more broadly, India would be a more desirable partner—both as a market and potential counterweight to China—if it could increase the proportion of its population able to afford cars, cappuccinos and international flights. Yet to do so, India must first treat such people as assets to be cultivated, not scorned.