The Income Glass Ceiling Of The Fragile Middle Class

The rapid growth of the last three decades has pulled a majority out of poverty, lifted a large percentage to a life of comfort & dignity. 

Growth has largely been driven by middle-income households’ disposable income and spending power. The vibrant middle-class is an avid consumer and a catalyst to growth. The number 6 crore households and are the backbone, growth engine and heartbeat of the economy.

Over two-thirds of the economy is domestic-focused. They nourish the economy, contributing a sizeable indirect tax revenue.

‘Invasion’ of the ‘aspiring’ into the middle-income is on the rise

This is good news. The segments are porous, transition and mobility are seamless. Pandemic earlier and job layoffs now have added to the porosity. However, the threshold for the upper-middle and the rich is high, rare, and ‘generational’. Not decadal. Middle-income transit up rarely.

Policymakers do not have a definition for the middle class. Most others use it loosely. Anyone above the ‘poor’ or below the rich threshold is ‘bracketed’ as the middle. Crux study of sixteen thousand households across five income spectrums insights that India needs a composite and holistic indicator which is based on multiple economic features intertwined with social characteristics. While income indeed is the key, credentials like skills, occupation, education, and housing, and other factors like social networks, and lifestyles, too are important components. 

The study concludes that welfare and subsidies must be pivoted on more holistic, equally relevant indicators. We have none. 

Middle income neglected. Punch below their weight politically

It highlights that aspirers have a higher income stream with an average of nine of ten adults in the household involved in ‘earning’ activities. This is imploding with the gig economy. Most are plumbers, carpenters, electricians, mechanics, blue-collar workers, street vendors, housemaids. They are ‘indispensable’. A large proportion is ‘outsiders’ (migrants). 

The middle-class household has only six of ten adult-earning members. And as a result, unable to keep pace with the rising costs of healthcare, childcare, education, and housing, among other monthly expenses. The study further highlights hospitalisation, or a job loss sets them back by three years. Inflation hurts the middle more. 

Despite GDP growth, the income of middle-income households has ‘stagnated’, in relation to the aspiring class over the last decade. This is in stark contrast to the income trajectories of those at the bottom (admittedly the state provides a stronger and wider safety net) and the very top of the income pyramid. 

Four of the five respondents lamented that they are orphans. The Crux study articulates boosting the income of the middle and the poor is socially accretive a big economic driver. While income inequality is bad for growth, and its sustainability, the income distribution impacts growth rate; often more if the social platform is skewed. A Rupee in the wallet of the middle-income enhances the growth rate by a tenth, against the same Rupee in the vault of the rich. The poor and the middle consume a higher portion of the income, triggering a consumption-led virtuous growth cycle.

Earn more than graduating engineers. But forfeit the societal respect  

The aspiring class ‘invest’ a higher proportion of their income and effort on vocational skills. Their children enter the job market early, and graduate as ‘master’, enhance productivity within two years. Most carpenters, plumbers, and electricians earn more than 90 per cent of the graduating engineers. They forfeit societal respect.

The future is not bright either. 

Taxes and transfers normally reduce the level of inequality but have done little to support the middle-incomes. The increasing redistributive (disguised as welfare) trend bypasses them.

Addressing the challenges will require a multifaceted approach. A potential solution is to create better-targeted government programs including subsidies for health insurance, education, and housing. Equally, incentivise those who pay taxes. The government should provide ‘capital’ for entrepreneurship, augment by linking them to the larger economic ecosystem, and nourishing them until they stabilise. A success rate of 10% will pay back.

Middle of nowhere. Let down by the state

Individuals too need to take bigger, judicious steps. They must invest in skills & entrepreneurship. White-collar jobs are not sustainable in a rising automation environment, even less for the low-skilled. Middle class need to embrace the idea that low-end white-collar jobs are getting scarce, and saturated. They must realise that competition for jobs is intense, never been fiercer.  

They have for long ‘banked’ on education as a means to jobs and a comfortable lifestyle. The premium attached to education has flattened (salaries of newly minted computer science graduate has not even kept pace with inflation over the last three decades). Payback (cost to salaries) is now five years and upward in many cases. Employment opportunities are now centred around skill, less on ‘degrees’. They must adopt the idea of dignity of labour. 

While the contribution of women to the household is meaningful the significant other must ‘move’ out to the workplace to augment the primary income. The gig economy is a godsend opportunity. They also need to rein in non-essential expenditures. The study highlights that the expenditure on marriage is about six times the average annual salary of the groom. 

Over 60 per cent of the respondents believe that their children will be financially worse off than their parents. At the beginning of the century, over 90 per cent of the children did better financially than their parents. Now the number is close to 30 per cent. The rate of upward mobility is diminishing too. The good news is that children born into poor families will do better than their parents.

‘Opting’ out of the democratic process. A worry 

The Crux study highlights and implies there is an income convergence of the aspiring and the middle class activated by income stagnation of latter and the growth of the former. While we celebrate the growth of the aspiring class, the policymakers must ensure the middle income doesn’t slip and is left behind.

This will need a concerted, equally collective response.