The truth about India's middle class

Nestle’s top boss is worried.

This is what he said recently,

“…the middle segment, which used to be the segment that most FMCGs used to operate in, seems to be shrinking.”

And it’s not just him. Even other Fast Moving Consumer Goods (FMCG) companies such as Colgate Palmolive, and Britannia have expressed similar sentiments. They’re worried that people aren’t buying biscuits and soap like they used to. They’re worried about India’s middle class.

But wait…

Because on the other hand, 1.3 crore Indians reportedly attempted to buy Coldplay tickets when it went on sale a couple of months ago. And SUV sales are soaring.

So others point to this figure to say that these are signs the middle class is fine and dandy.

Now you might be wondering?—?what on earth is the truth about the middle class?

Okay, to begin with, let’s try and define who exactly is middle class in India.

If we ask you to define it subjectively, you might say things like middle class folks are the ones who live primarily in the big towns and cities. They’re the ones who take a flight every year, they have a car in their garage, fridges and washing machines in their homes, who have a bottle of liquid hand wash near their wash basin, the ones who buy packaged wheat (atta) instead of the loose ones, and maybe ones who pack some boiled broccoli in their lunch boxes.

Sounds fair?

Alright, so let’s try and get objective now. And we’ll use Goldman Sachs’ pyramid for this.

But for a second, just think back to the ‘subjective’ definition of the middle class persona we laid out.

Remember it well?

Okay, now sorry to burst your ‘middle class bubble’ but that’s the sort of definition the?investment bank? actually used to define the ‘affluent’ group in India. Affluent is just a fancy way of saying rich! And these rich people earn around $10,000 a year, or roughly ?8.5 lakhs.

So yeah, Indians all love saying they’re middle class, but if you earn more than ?8.5 lakhs in a year, who’re you kidding! You’re not middle class. Colour yourself rich and elite because only 4% of India’s working age population fit that bucket.

Now we’re not saying that the crowd on the lower threshold is buying Coldplay tickets and the latest SUVs. But it’s definitely those folks in that vicinity that don’t seem to have too much of a problem with money.

So, to get the middle class, let’s remove the top of the pyramid. And the bottom too. The bottom that earns less than $1,500 or roughly below ?1.25 lakhs a year. They’re the low-income category or the poor and they make up a whopping 50% of India’s working population.

Ergo, what we’re left with, is the middle class.

Indians who earn roughly between $1,500 and $10,000 or between Rs 1.25 lakhs and Rs. 8.5 lakhs.

This includes your house help, a Swiggy gig worker, and an engineering graduate fresh out of college.

And here’s where the problem seems to lie.

Because when?analysts at Goldman Sachs ?dug into it, they found something quite clear cut when they analysed companies operating in the same sector but catering to the different income groups?—?the affluent and the not so affluent.

So in cars, for instance, we compared SUVs to other kinds of cars. Or we compared premium liquor and spirits brands to more mass-market brands. We also looked at hospital or watch companies that exclusively target affluent consumers. All these stocks?—?they’ve done significantly better in terms of returns.

Simply put, the not so affluent folks seem to have tightened their belts and that’s affecting companies.

But why’s that happening in the first place?

Well, most people point to the inflation-wage relationship here.

See, inflation’s quite bad in India right now. It hit at a 14-month high of?6.21% in October. ?And food inflation is much worse?—?it’s in double digits. This has left less money in peoples’ wallets for discretionary purchases.

Alongside this, people haven’t seen their income grow. Economists at Citi looked at inflation-adjusted wage costs for listed Indian firms. They felt it would be a good proxy for urban India. And they found that in this calendar year, the growth has been just 2%. This is significantly lower than the 10-year average of 4.4%.

So you can imagine that people naturally feel the pinch of this.

And sure you could argue that this inflation-wage dynamic troubles the ‘affluent’ category too. But the counterargument is that the affluent folk will probably have a few years of savings or investments aka wealth that has grown significantly. So put together, they’re not feeling the pinch of this. At least not as much. And maybe not as yet.

It’s the middle class that’s feeling the pinch.

And if you’re wondering how long it will take to turn things around, it’s a question everyone wants an answer to.

The one ray of light that the government has pointed out is that its?‘Future Expectations Index’? where people indicate what they feel about the economy is positive. And that sentiment might be enough to keep India’s middle class consumption machine chugging.

But before we end this, there’s one more question we need to answer. About something we raised at the start of this story. And that’s the question of whether the number of folks who can be called ‘middle-class’ really is shrinking as Nestle’s top boss hinted.

To answer that, let’s look at another pyramid. Or some shape sort of like one. This time from the think-tank People Research on India’s Consumer Economy (PRICE). With the focus being for households.

At first sight, there’s a problem. Because the percentage of India’s households in the middle income group doesn’t really change between 2018 and the forecast for 2030.

That sort of corroborates what Nestle is worried about. The middle class is stagnant. Or even shrinking.

But look a little deeper and you see what could be the future of India. A positive future.

Because the number of households in the low-income bucket could drop drastically?—?from 43% of the population in 2018 to just 15% in 2030. The poor are moving up the income ladder.

And simultaneously, the middle income folks are becoming affluent.

So just like that, India could become a much richer country. We could have 1 in 2 households falling into the affluent category by the end of this decade.

That will be something!

And we’ll leave you with what Nikhil Ojha, senior partner with Bain & Co, told the?Financial Times? last year.

“Anyone who is looking at the Indian economy from the rear-view mirror is going to underestimate not just the quantity but also the quality of the changes in consumption that are coming in India.”

Let’s wait for it!