Home / Opinion / Columns /  An urban middle-class revival is key to India’s economic recovery

It is now well known that India’s rural economy has been in distress for quite some time. There is enough data that points to this distress worsening. However, unlike the rural economy, there is not much data on what is happening to the urban economy. This is partly because there is not much regular data on wages or incomes in urban areas, but also because of the heterogenous nature of urban economic activity. However, there is still enough evidence to suggest that rural distress has spilled over to the urban economy, particularly the middle class.

Unlike wage data from the labour bureau which tracks the rural economy on a monthly basis, there is no such data for the urban economy. But there are periodic labour force surveys (PLFS) which provide wage earnings of urban workers. These are available for four years starting 2017-18, with the most recent being 2020-21. Unlike rural areas, almost half the workers in urban areas are regular workers who receive regular wages/salaries. They are also part of the so-called urban middle class.

While wage earnings of casual workers in urban areas increased by 3.3% per annum between 2017-18 and 2020-21, these actually declined for regular workers by 0.8% per annum. In fact, the earnings of a regular worker in the April-June quarter of 2021 were 3% lower than in the same quarter of 2018. This decline was a continuation of the trend seen earlier between 2011-12 and 2017-18 when wages of regular worker wages declined by 1.7% per annum. Essentially, a regular worker was earning 14% lower wages than a decade ago. Much of this decline was among highly educated workers.

A better way to understand the economic situation in urban areas is to look at the consumer confidence surveys of the Reserve Bank of India (RBI). These are conducted in major urban centres and are fairly representative of the mood of urban consumers. The RBI survey asks a variety of questions to gauge how respondents perceive their economic situation on different parameters and their expectations a year ahead. While these are available for most parameters since September 2012, data on spending intentions is available from September 2015. For every question, respondents report whether the current situation has improved, worsened or remained same. The gap between those reporting improvements versus those who report worsening is treated as the net response.

As expected, during the turbulent years of the ‘taper tantrum’, high inflation and policy paralysis before 2014, net responses were mostly negative. So most respondents felt that their economic situation has worsened. But it turned positive after the government changed in 2014 and remained so until December 2016. Since then, it has remained negative. In November 2022, 56% respondents reported that their economic situation has worsened, while only 28% reported improvement. The situation on employment is no different, with the net response having stayed negative throughout the last six years beginning December 2016. On incomes, net responses turned negative from September 2019 onwards. This is also reflected in the intention to spend on essentials and non-essentials. The net response on spending intention on non-essentials started declining after 2017 and has been negative since September 2019. Given the sharp slowdown in the Indian economy after 2017, these data trends are reasonable indicators of the situation in the urban economy. Most of these suggest that the urban economic situation started worsening well before the pandemic, which only worsened matters.

Further, economic vulnerability is high in urban areas due to a lack of comprehensive social security, unlike in rural areas, which benefitted from government largesse by way of increased food allocation, direct cash transfers to farmers and the employment guarantee scheme. Even for food schemes, most migrants remained out of it.

Yet, it is urban areas that hold the key to an economic revival. The distress is an indicator of declining demand in the economy. A large part of the demand for discretionary or non-essential spending comes from urban India. With inflation further eroding the purchasing power of urban consumers, we are facing the biggest demand crisis we have seen in recent times. Given that our exports are declining, a revival in external demand is unlikely amid signs of a global recession. If the budget’s priority is a revival of India’s economy, helping increase the incomes of our middle class to drive demand is the only option.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Recommended For You
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout