Jobs lost, income cut: How Covid-19 dented India’s middle class

31 August 2021

Follow Ziraat Times on Whatsapp - Join Now

New Delhi, Aug 30:When the second wave of Covid-19 was beginning its steep climb in India in April 2021 and most states were locking down, the country witnessed an unexpected freeze on economic activity.

In March this year, a widely reported analysis by American think-tank Pew Research Center said that the pandemic had knocked about 32 million Indians out of the middle class in 2020. It further found that India contributed the largest share–about 60 per cent–of the total global decline in the middle class during the pandemic. To arrive at the numbers, Pew used the World Bank’s PovCalNet database and factored in real gross domestic product (GDP) growth estimates for the financial year 2020-21.

The economists that IndiaSpend spoke to, however, did concede that the pandemic has dealt a blow to millions of poor and middle-class households–a trend that would significantly affect India’s growth prospects–but dithered from putting a number on it in the absence of clear definitions of this class and reliable estimates of its size in the first place.

“Middle class is a fluid category, people constantly move in and out of it, mainly because of the precarious nature of work in India and the informal economy,” Maryam Aslany, economic sociologist and senior researcher at the Peace Research Institute in Oslo, an organisation that conducts research on peaceful relations between states and people, told IndiaSpend. “All this makes it very difficult to say with certainty how many people have left the middle-class category at the time of Covid-19.”

Definitions and estimates vary widely

After India’s economy registered years of high growth beginning in the early 2000s as market-oriented reforms set in, economists and institutions sought to estimate the size of India’s middle class, which was driving the country’s consumption story and was largely based in urban areas.

In 2019, Homi Kharas of the Brookings Institution estimated that about 380 million Indians–with per capita incomes between $11 and $110 (in purchasing power parity terms) per person per day in 2011 (equivalent to Rs 171 and Rs 1,714)–would enter the middle class between 2015-2022.

India’s National Council for Applied Economic Research (NCAER), which defines the middle class as those with household incomes between Rs 2 lakh and Rs 10 lakh per annum, estimated India’s middle class to be 153 million in 2010. In 2012, however, a study by the Center for Global Development, a Washington D.C.-based economic research group, which used a similar income threshold but factored in the National Sample Survey conducted between July 2009 and June 2010, estimated the middle class to number less than 100 million. Other estimates over the past decade have variously put the number between 70 million and 600 million.

“The problem is there is not enough data,” Amit Basole, associate professor of economics at Azim Premji University, told IndiaSpend. “The consumption survey–which reported that consumption has declined–seemed to paint a very different picture from what people were generally thinking. So Pew says that not only was there no growth in the middle class [in 2020] but there was a shrinking. That’s a very different kind of statement and I frankly don’t know what to make of it.”

Even before the pandemic, India’s economic growth was slowing. Since at least 2012, a time when growth picked up after plateauing in 2011, the recovery was not sufficient to create enough jobs and expand India’s formal economy. In 2019, a leaked National Statistical Office survey, which Basole referred to, showed that consumption fell for the first time in over four decades in 2017-18. The expansion of India’s urban middle class was slowing down while the growth of the rural middle class had become static in 2015, economists Anirudh Krishna and Devendra Bajpai had found. Instead of using consumption or expenditure, Krishna and Bajpai used assets as the criteria for estimating the size of India’s middle class, which they said increased from 129 million in 2001 to about 228 million in 2011, with a majority in the ‘precarious’ middle class.

“There is a [small and] secure middle class who are in the formal sector and there is a [large] precarious middle class with no fixed jobs and income: traders, small businessmen, people who are paid reasonable wages because of the skills they possess. For instance, an X-Ray diagnostician,” Krishna, professor of public policy and political science at Duke University, US, told IndiaSpend, “So this [slowdown] in growth of the precarious middle class–going together with the slowing down of the economy–put a plateau on top of middle class growth.”

“We use the terms “middle income” and “middle class” interchangeably for the sake of convenience. The focus of our analysis is strictly economic, i.e. how the pandemic may have affected the size of an income tier, and I am not able to say what the findings may be under another definition,” Rakesh Kochhar, senior researcher at Pew Research Center, told IndiaSpend in response. “In the past, we have also used self-identification in surveys of the American public to determine who is in the middle class. But I am not aware of a similar exercise for India.”

Aslany, who published a study on the Indian middle class in 2019, found that contrary to most assumptions, a significant segment of the Indian middle class resides in rural areas. About 28.05 per cent of India’s population was middle class, Aslany found, adding that 52.31 per cent of the lower middle class, more than 32 per cent of the comfortable middle class, and more than 23 per cent of the upper middle class was in rural India. Most of the lower middle class in rural India are involved in agriculture, he said.

To gauge the deeper impact of the pandemic on Indians, the focus should be on the poor, Aslany said. “The middle class has come to hold the centre stage in economic and public discourse: Its size is often used as an important developmental proxy. But is that a useful category to focus on, when we look at the impact of Covid-19 in India? [To begin with] the size of the middle class is much smaller than it is assumed. In 2019, I estimated it to be 28 per cent of the Indian population. But the interesting point is that more than half of the Indian middle class is actually in its lower tier, who are indeed bordering the poor,” Aslany told IndiaSpend.

Poorer after pandemic, but still middle class

In June, unsure of who to ask for help, Brack Ambrose, a grade IX student from Kollam district in southern Kerala, tweeted to two of his idols, American singer Justin Timberlake and Hollywood star Robert Downey Jr., with a request to help him get a smartphone so that he could continue with his studies. “Can’t you step forward to help students like us [sic] this is my humble request,” he wrote. As the second wave of Covid-19 slowly ebbed, the family’s small fortune had been swept away in the economic tide and pushed the Ambrose family into a financial crisis.

“It was not supposed to be like this. I had planned for our future,” Brack’s father Antony, 42, who lives and works in Goa, told IndiaSpend. Over the past few years, Antony had saved Rs 4 lakh, almost all of his life savings, and after the first wave of the pandemic, had invested it in his dream venture, Shree Bar and Restaurant in Old Goa in March this year. “Who thought that a second wave of Covid-19 would hit India? Even the government didn’t warn us,” he said. Today, his business lies shuttered and he finds himself in debt, unable to pay for his three children’s education. “I really wish there is no third wave and there are no more lockdowns. This is my only hope… I have never seen such bad times in my life,” Antony said.

Numerous such families lost financial assets such as savings and bank deposits, a recent Reserve Bank of India (RBI) study found. The ratio of household bank deposits to gross domestic product (GDP) declined from 7.7 per cent in the second quarter of 2020-21 (July-September 2020) to 3 per cent by the third quarter (October-December 2020), the RBI said. At the same time, the household debt-to-GDP ratio has been increasing steadily since the end of 2018-19, and “rose sharply” from 37.1 per cent on September 30, 2020 to 37.9 per cent by December 31, 2020. A year into the pandemic, 230 million Indians slipped below the national minimum wage threshold, according to a report by Azim Premji University.

“We don’t have a definition of middle class, but we do have a definition of the poor and anybody above that threshold is classified as non-poor,” Himanshu, associate professor of economics at Jawaharlal Nehru University, Delhi, told IndiaSpend. “Certainly the class that we call consumers–the class which has a large amount of discretionary spending–has been hit the most. Jobs have been lost and wages have been reduced, so spending has been hit for most of these people.”

Economists also told IndiaSpend that a lack of a large middle class such as in China is rooted in the structural flaws in India’s growth model, which, for instance, could not create sufficient formal sector and salaried jobs.

“In an economy where the income and consumption of the top 10 per cent is growing at, let’s say, 10 per cent, and in 90 per cent of the economy there is nothing happening… there is stagnation. [The] weighted average gives you a 1 per cent growth rate. So how can you have growth when you have only a certain segment of the population in the viable part of the economy?” Maitreesh Ghatak, professor of economics at the London School of Economics, told IndiaSpend. Weighted average factors in varying degrees of importance of the numbers in a data set.

Josh Felman, senior economist and director of economic research and analysis firm JH Consulting says, however, that even though the pandemic hit India’s middle class badly, there is little evidence that Indians fell out of it. “We have to make a distinction between being hit hard and falling out of the middle class. They have suffered, sure, but did they fall out of the middle class? I don’t think so,” Felman told IndiaSpend.

On the other hand, Felman said that even as the distribution of income worsened in India since market liberalisation, the living standard of the ordinary person improved, as evident in the rise in consumption of consumer goods, higher value food intake and better infrastructure facilities reaching India’s villages. “Reforms since 1991 touched a significant proportion of the population and not just the top 10 or 15 per cent,” he added.

Target pandemic aid at lower-income tiers

This February, before the second Covid-19 wave hit India, millions of Indian families and small businesses were losing income and not getting access to the credit they needed, Jahangir Aziz, JP Morgan’s chief emerging markets economist, had warned. This would risk a permanent scarring of the economy.

Government spending in response to the pandemic since last year has partially helped cushion the vulnerable population from the worst impacts of the pandemic, but have fallen short, multiple reports and surveys have found. During the second wave of Covid-19, the government did not opt for extra spending beyond the budgeted expenditure even as a series of lockdowns badly dented the economy; and while it netted record taxes in the first quarter of this fiscal year, about a third of ministries responsible for spending that is important for economic growth reported a year-on-year contraction in spending in the June 2021 quarter, according to a Centre for Monitoring Indian Economy (CMIE) analysis. “The government’s actions both in controlling expenses during a crisis and imposing austerity measures remains inexplicable,” CMIE noted.

On the contrary, India’s central bank, the RBI, has been at the forefront of the firefighting. Since the beginning of the pandemic, it has kept interest rates low and at the same time, injected a record Rs 5.3 lakh crore into the financial system, according to an Observatory Group research note by senior analyst Ananth Narayan, by way of purchasing government bonds and securities using an unconventional monetary policy tool known as Quantitative Easing (QE). QE was made popular by the American Federal Reserve, which used it in response to the financial crisis in 2008. Some studies have shown that QE leads to income and wealth inequality.

The money RBI put in the economy, however, rather than going to the real economy and the productive sectors in the form of credit, has found itself in the stock markets. As a result, both the S&P BSE Sensex, an index of 30 large companies, and NSE Nifty-50, an index of the 50 largest companies listed on the National Stock Exchange, have surged by about 86 per cent and 91 per cent, respectively, between April 2020 and July 2021. But GDP growth, a barometer for the health of the economy, contracted by a record 7.3 per cent in 2020.

In January 2021, the RBI expressed concern that there is a disconnect between the real economy and financial markets, adding that this posed risks to financial stability. As the pandemic eroded household incomes and savings, the listed financial companies made record profits in the March 2021 quarter, according to a CMIE analysis.

“While corporate earnings have zoomed, this is hardly the case for the MSME [micro, small and medium sized enterprises] sector in India that accounts for ~30 per cent of its GVA [Gross Value Added],” noted the NSE July report. “This phenomenon is readily apparent across multiple sectors in the economy.”

In its August ‘Ecowrap’, the SBI said industry credit contracted since the previous year, for corporates are substituting high-cost loans with cheap credit available in the market. RBI’s monetary policy could lead to high consumer price inflation and widen inequality, Narayan wrote in the research note.

Economists IndiaSpend spoke to said that targeting the poor, small businesses and lower middle class in terms of increased fiscal spending would not just boost domestic demand but contribute to India’s quick economic recovery. Additionally, a transition to an economic model that boosts mass consumption of consumer goods, education, healthcare and affordable housing would create a multiplier effect in the economy, they said.

“India is a large market. So if you raise incomes at the bottom, [people] will spend it on non-essentials, which will increase demand and lead to more production of non-essential goods, leading to a multiplier effect in the economy. People will get employed and wages will increase. This is a natural process,” Himanshu told IndiaSpend.

Targeting the rich and upper middle-class Indians would do little to help domestic demand, Himanshu said. “They won’t spend most of what they earn [because] a large part of it goes into idle money, which is conspicuous consumption. The money would be used to buy an iPhone, which would have no effect on your domestic economy. Poor and [lower middle class Indians] are more likely to spend on goods that are manufactured in the country.”

“If jobs return, we are looking at a return to pre-pandemic levels [of economic growth] in the next two-three years. But if the pandemic induces long-lasting changes such as companies deciding that they could do with fewer workers, then fewer jobs would return. Which means we would be looking at long-lasting reductions [in the size of the middle class],” Basole of Azim Premji University told IndiaSpend.

“But the bigger issue is, do we want to go back to the previous economic structure where a few million Indians drove the consumption story?” Basole said.