9 min read.Updated: 31 Oct 2019, 07:48 PM ISTRahul Jacob
Elements that propelled growth and widened India’s middle class are losing momentum. This should worry us all
Stunting of the middle class is the result of decades-long inability to make India a manufacturing hub for multinationals. Also, note-ban and GST have driven thousands of small firms out of business
When men make do with frayed innerwear garments, economists worry. Alan Greenspan, the former US Federal Reserve chairman, used declining innerwear sales, The New York Times reminded us last month, as an indicator of an impending slowdown because it suggests consumers are cutting back spending sharply.
For stalwarts of India’s innerwear industry, the new normal of decelerating growth is already a couple of years old.
“It’s been a sustained slowdown since demonetization, which got worse after GST," says Sanjay Jain, managing director of TT Ltd, which makes vests priced at ₹60 to ₹100 and underwear that starts at ₹80. The Federation of Hosiery Manufacturers’ Association of India says sales have fallen by 25% this year. Jain, an alumnus of the Indian Institute of Management in Ahmedabad, adds, “Every time we see a lift, it’s not sustainable. We are not seeing any encouraging signs."
In India, where millions have only in the past decade or two clambered onto the bottom rungs of the consumption ladder, buying more than food and basic clothing, the trend to cut back on replacing innerwear is troubling. Lately, consumers have been cutting back on many things, from biscuits and soap to jewellery and cars. Pronab Sen, India’s former chief statistician, argues, “Over time, if there is stagnation in upward movement (in income distribution)… you’re stuck. The market for corporates becomes limited. Hope is not lost yet, but time is running out."
From the Reserve Bank to Hindustan Unilever, the assumption is that the downturn is cyclical, but something much more profound than millennials opting not to own cars is unfolding: India’s middle class could be permanently stunted.
It is already a small middle class, variously estimated to be 1% to 20% of the population. Its ownership of computers and washing machines is tiny as a percentage of the total population compared to its cohorts elsewhere.
Deja vu, 1992
I played a small part in what quickly became a national sport of exaggerating the size of India’s middle class. In the first magazine cover story published in the US in 1992 on India’s economic reforms, I quoted a National Council of Applied Economic Research (NCAER) survey that estimated that India’s middle class was between 100 million and 300 million.
The then managing editor of Fortune magazine, Marshall Loeb, was obsessed with the counterintuitive story of a fast-growing middle class in a country still synonymous with poverty. For my story, Loeb devised a headline that trumpeted, “India Opens for Business: The world’s largest middle class beckons foreign investors." The article quoted NCAER data which estimated that the lower middle class, with annual household incomes of $700 to $1400, was responsible for 75% of unit sales of radios and soap and between a third and half of all shampoo and TV sets.
It was my first cover story, yet, I regret aspects of it. While the article had a few caveats about the limited purchasing power of India’s middle class, it still reads as unbalanced. In a final irony, Loeb ensured I was promoted after it was published, thus propelling me into the ranks of the American middle class.
My promotion was partly the reward for an overly rosy assessment of India’s prospects. It was not fake news, but it offered a vision of an India mostly unencumbered by centuries of grotesque caste and gender inequality and almost five decades of bumbling socialist bureaucracy—major handicaps that hobble the expansion of the middle class to this day.
A vague national aspiration
A couple of months ago, economist Himanshu parsed the data released by the National Sample Survey Office in the absence of more detailed consumption expenditure surveys that the government has chosen not to release. He reported in an article for this paper that in 2018 prices, average rural consumption expenditure declined from ₹1,587 per person per month (ppm) in 2014 to ₹1,524 ppm in 2017-18. The decline in urban areas was from ₹2,926 ppm in 2014 to ₹2,909 ppm in 2017-18.
As those startling numbers indicate, almost three decades after reforms started in 1991, the very notion of a middle class is more of a vague national aspiration than an actuality in India. “The middle class in our minds is actually the upper class," says Rama Bijapurkar, the well-known marketing consultant. Bijapurkar repeats the witticism that the middle class in India is “more sociological than logical." She prefers the term Middle India. That is a better description for people who are merely in the middle of the population in income terms but not at all a middle class. Those with a per capita income between $10 and $20 a day belong to the global middle class, according to a 2015 Pew Research Centre report. This would translate into the top 3% of India’s population.
A sleight of hand
Reading about the birth of the US’s middle class is a reminder of how far India has to go. Economist Robert Gordon argues in The Rise and Fall of American Growth that the large productivity increases in the US occurred in the 50 to 100 years before 1970 as the middle class grew dramatically and became more productive because of increased ownership of everything from the motor car to the washing machine.
This qualitatively changed lives across the country in a more dramatic manner than the computer has. The successive drops in the price of Ford’s Model T car meant that nearly 90% of American households had acquired cars in the first three decades of the 20th century, up from a mere 8,000 households in 1900.
By contrast, a hundred years on, India’s middle class seems a sleight of hand on a calculator, the result of projecting years of exponential growth. In a cover story last year in The Economist, Stanley Pignal, warned that “a strategy of waiting for the middle class to develop a taste for products that the global middle class indulges in may lead to decades of frustration. If nearly 300 million Indians count as middle class, as HSBC has proclaimed, some of them make $3 a day…for only one in ten Indians would the latest iPhone represent less than half a year’s salary."
Purchasing power parity calculations are useful to explain how lower rents and food costs increase buying power, but, ultimately the price of an iPhone or a Honda City car in India mimic international prices and one needs a large, genuinely well-heeled middle class. The cost of a part-time help or the services of a chauffeur in India may make life comfortable for those able to afford them, but these are held down precisely because of the inability of millions to find better work in factories and offices.
The reforms needed
Starkly incomplete reforms with regard to liberalizing labour laws, improving education and nutrition, freeing up agricultural prices and improving the stewardship of state-owned banks have hobbled the growth of the middle class. A seemingly infinite legacy of inequality of caste and poor education has not helped.
Economists such as Angus Deaton and Joseph Stiglitz have shown how inequality brought more inequality in the US as the workforce there was buffeted by technology and globalization and the cost of college education skyrocketed. In India, this challenge is multiplied because our primary and secondary education is so poor and millions of our children are malnourished. The stunting of the Indian middle class is also the result of the decades-long inability to make India a manufacturing hub for multinationals. The more recent arrested progress has been the result of demonetization and a chaotically-implemented goods and services tax (GST)—both appear to have driven thousands of small firms out of business and have bludgeoned the informal sector. Nowhere in the world has a country built a middle class without transitioning via a large share of employment in manufacturing.
Still, India seemed to be doing well enough till the financial crisis of 2008, on the back of increases in exports and a booming software and business processes outsourcing industry. Contrasting the growth rates then and now in The Indian Express, Harish Damodaran pointed to two-wheeler sales jumping from 3.6 million in 2000-01 to 16.5 million in 2015-16 while passenger cars quadrupled to 2.8 million over the same period.
Over the past five to six years, this expansion in consumption was despite a lack of rapid income growth. Real rural wages had been limping at about 1% annual growth for more than half a decade but sales of non-durables continued to motor along. The likely explanation is that consumers remained confident that their incomes would eventually rise, and continued to spend freely. The drop in household savings by about five percentage points over the past few years to about 17% of the gross domestic product is a reflection of such optimism.
Now, different elements that propelled the growth trajectory that widened India’s middle class are sagging. Manufacturing exports over the past five years have scarcely grown at all. Construction is beset by unsold housing inventory of about $60 billion. IT services, responsible for a visible expansion of a genuine middle class in cities such as Gurugram and Bengaluru, has grown to be a $180 billion behemoth.
IT services are projected to have an annual growth of around 7-9% off a much higher base, but that contrasts with about 30% in the first decade of the 21st century. “You cannot apply the model of growth that characterized the rest of Asia. These countries rode the wave of globalization and moved up from making shoes to computers," says Nandan Nilekani, non-executive chairman of Infosys. “Manufacturing requires superb infrastructure."
Crucially, a growing middle class requires the wide participation of women in the workplace. India’s female workforce participation rate has fallen to 24%.
Sure, India will benefit from the relocation of factory work from China, but much less than it needs to build a middle class. The gig economy is projected to create 1.5 million jobs this fiscal year, but few working at the receiving end of artificial intelligence’s whip hand regard these jobs as stable or secure. This is a tragedy for India not just in economic terms but because the journey into the middle class is usually a path out of grinding menial labour.
I spoke recently with Rajesh Kumar, a factory employee at Shahi Exports, India’s largest garments exporter. Kumar, 47, had started as a sweeper in the factory. After retraining, he worked his way up to supervisor at its Faridabad factory. Owning his home and switching from the bicycle he once had to the motorcycle he rides today and a salary of close to ₹25,000 per month gives him a sense of security. For vast numbers of Indians, however, the prospect of financial security and genuine advancement is slipping out of reach.
On Sunday, I was driven home by a novice driver from rural Karnataka using his “employer’s" Uber identity. Unkempt and exhausted, he had slept in the car over the past two days. He did not understand the zig-zagging blue arrows on Google’s maps. “Slight left" in Google’s artificial English inevitably proved incomprehensible.
This microcosm of misery of a recent job-seeker in the shining city was a reminder that the gig economy, for all its frenetic energy, will also fall well short of building the broad middle class India needs.
Rahul Jacob is a former business writer in Asia for Time magazine and former Hong Kong bureau chief for the Financial Times