Why in the News?

The new income tax structure offering income tax relief to the annual income of ₹12 lakh provides the much-needed tax relief to the middle-income class in India.

More on the news

• The nil tax slabs has increased from INR 7 lakhs to INR12 lakhs under the new tax regime, with salaried taxpayers effectively benefiting up to INR 12.75 lakhs due to the INR 75,000 standard deduction.
• The tax relief to the middle class seeks to uplift disposable incomes and stimulate consumption thereby driving growth in the economy. 

About Middle Income Class (MIC)

• Definition
  • Though, there is no specific definition of the middle-income class, yet different approaches have been used to define them. Some of them being: 
    • Organisation of Economic Cooperation and Development (OECD) considers those whose earnings are in the range of US $10 to US $100 per day to be the middle-income class. 
    • The People Research on India's Consumer Economy (PRICE) defines the middle-income class household with an annual income of Rs. 5 lakhs to Rs. 30 lakhs (at 2020-21 prices).
  • Therefore, they can be regarded as the socio-cultural groups which are economically secure with little chance of falling into poverty or vulnerability. 
• Within the MIC, there are notable variations
  • Lower Middle Class:  Spend much of their income on private healthcare, education, non-essential consumer durables and assets like vehicles, basic household appliances, etc. 
  • Upper Middle Class: Along with spending on the above areas, also spend on discretionary goods and are likely to own luxury assets like computers, air conditioners, etc. 

Growth of Indian Middle-Income Class

• Pre-Independence: The MIC initially comprised a small group of educated, upper-caste, English-speaking elites, shaped by British colonial education policies.
• Post-Liberalization Expansion: The Liberalization, Privatization, and Globalization (LPG) reforms of the 1990s marked a turning point. It opened the Indian economy to multinational corporations, creating new job opportunities in services and IT sectors. This expanded the MIC significantly, especially in urban areas.
• Current and Future Projections: According to PRICE, India's middle class is projected to grow from 31% in 2021 to 38% by 2031 and further to 60% by 2047.

Impact of the Changing Nature of Middle Class on various domains

Economy

• Driving Consumption: Rising incomes and the expansion of middle-class will reshape future consumption driving incremental consumption on apparel, communication, personal care, etc.
  • Middle-class and rich households will drive nearly $2.7 trillion of incremental consumption spend by 2030-31 (PRICE). 
• Emergence of New Market: The urban middle-income acts as a huge market and a revenue source for local and global companies, with brands designing policies to effectively target them. 
  • The MIC also promotes a dynamic entrepreneurial environment by creating demand for startups and new services.
• Inclusive Growth: Strong and prosperous middle class support healthy societies with investment in education, health, intolerance of corruption, etc., offering the basis for inclusive growth. 

City Infrastructure

• Making Tier II Cities attractive: Rising affluence and higher purchasing power of the middle class would make the Tier II and III cities attractive on the demand side.
• Emerging Growth Centres: The new middle-income consumption patterns are aspirational leading to the rise of various entertainment centres in the cities like coffee shops, shopping malls, recreation centres, etc.
• Emergence of Residential Societies: While earlier gated residential societies were looked up as the preferred housing model for the upper classes, with the emergence of the middle class, it has percolated even to the tier II cities.

Social

• Better Socio-Economic Outcomes: Researches have established that higher share of middle class creates better institutions which in turn lead to better socioeconomic outcomes.  
• Foster Social Values: There exists a positive feedback relationship between values and economic growth as when the wealth increases, individuals tend to be more likely to hold democratic values, emphasize free speech, de-emphasize religion, and care more about the environment.

Challenges faced by the Middle-Income Classes in India 

• Rising Inflation: The privatization of healthcare and education has made quality services expensive, straining middle-class finances.
• Unemployment: The high levels of unemployment or underemployment leads to financial insecurity and a lack of stable income.
• Stagnant Wage Growth: Despite economic growth, middle-class salaries are not rising proportionately, affecting their purchasing power.
• Technology Threat: The automation of jobs is displacing many middle-class professionals, particularly in banking, IT, and manufacturing sectors.
• Taxation and Insufficient Social Security: Despite being the primary taxpayer group, the MIC receives limited tax incentives and social benefits compared to lower-income groups.
• Debt Burden: To meet lifestyle aspirations, the MIC often resorts to consumer loans and credit card debts, increasing their financial vulnerability.
  • In FY23, India's household debt has reached 38% of GDP, reflecting a growing trend in household leverage (CareEdge report).
• Social Constructs: Like patriarchal attitudes often affect middle-class women in professional settings, limiting their career growth.

Reasons for the Neglect of Middle Class in India

• Self-Sustaining Trait: There is a misconception that the middle class is self-sustaining and not require government support, despite facing increasing pressure from indirect taxes, inflation, etc. 
• Heterogenous Composition: This segment comprises of populace from various sections like public sector employees, unorganised workers like carpenters, gig workers, etc., making it difficult to design a particular incentive for them. 
  • Middle class usually do not organize into pressure group and are less ideologically driven, even political leaders emerging amongst them have lack of focus on them. 
• Lower Political Participation: Lower voter turnout among the middle class is the primary reason for them being politically and economically overlooked. 
• Limited Representation in Policy-Making: Middle-class concerns are underrepresented in policymaking bodies, which are often dominated by business lobbies or rural-centric agendas.

Conclusion

Empowering the middle class requires a multifaceted approach, including tax benefits, affordable housing, and strengthened labour market policies. A comprehensive, stakeholder-driven action plan is essential to address their vulnerabilities, enhance financial security, and promote sustainable growth, ensuring their continued contribution to the economy and society.