India’s shrinking middle class: Indian economic policy over the past decade has worked best for two groups. Households at the bottom have benefited from food support and direct transfers. At the top, the number of income-tax returns reporting more than ₹1 crore has risen about sevenfold, from roughly 50,000 in 2013-14 to nearly 350,000. Between these ends sits a large group whose incomes and economic security have barely moved. The problem facing India’s middle class is stagnation.
Definitions matter. A conventional middle-class band of ₹5-30 lakh a year captures the middle of the population, according to economic research organisations like PRICE. India’s middle class population is estimated at roughly 432 million people, which accounts for about 31% of the total population. Depending on the economic definition used, estimates vary from 31% to over 50% of the country.
That is the segment in which income growth appears weakest. Detailed income-tax data by income slice have not been published after 2022-23. The Finance Ministry should restore the series.
READ | India’s tax collections surge rests on middle class strain
Shrinking middle class and the jobs problem
Employment is the clearest explanation. Private recruitment-platform data suggest that white-collar hiring has slowed since the post-pandemic recovery, with information technology no longer generating the employment growth it once did. Hiring across several major white-collar sectors has remained subdued since 2022.
Automation has long reduced demand for routine middle-skill work. Artificial intelligence extends that pressure from the factory floor to the office. India therefore has to create enough quality jobs for the millions who have invested in higher education.
Labour force surveys show that unemployment is highest among young graduates. Graduate unemployment is significantly above the national average before declining with age, highlighting the growing disconnect between higher education and labour-market demand. Competitive examination preparation may explain part of this pattern, but it does not make the economic cost disappear. Families and governments finance degrees whose labour-market returns are increasingly uncertain. A socialist education system has been grafted onto a capitalist economy. Course capacity, public funding and training incentives need a closer link to actual demand for skills.
Living costs have moved in the opposite direction. Headline inflation does not fully capture the expenses that matter most to urban middle-income households.
For many urban families, spending on healthcare and education has risen faster than overall consumer inflation, even if official price indices do not fully capture these costs. Annual healthcare inflation is at 14% and education inflation is at 12%, numbers that widely circulate in financial planning and commentary in India. At the same time, wage growth in many white-collar occupations has struggled to keep pace with inflation, resulting in weaker real income growth.
Debt has filled part of the gap. Household debt is estimated at 46% of GDP. Consumer credit, particularly unsecured personal loans, has expanded rapidly, often carrying significantly higher interest rates than housing loans. Unsecured borrowing cannot provide a durable substitute for wage growth.
READ | Small car sales crash reveals middle class squeeze
Economic policy leaves the middle exposed
The fiscal structure adds to the squeeze. Around 800 million people receive free grain, while the income-tax exemption threshold under the new regime has risen to ₹12 lakh. This has narrowed the effective direct-tax base. Middle-income households receive fewer transfers than poorer households, pay GST like everyone else, and finance much of their own education, healthcare and housing.
A broader direct-tax base with lower rates would distribute the burden more evenly. Better public schools, hospitals and urban services would reduce the private expenditure now borne by households. That would do more for middle-class disposable income than small annual changes in tax slabs.
READ | Middle class squeeze behind worrying economic growth numbers
Financial regulation offers another route. SEBI’s studies have found that the overwhelming majority of retail participants in the equity derivatives market incur net losses. Whatever the exact figure, household losses in speculative financial products deserve regulatory attention. Insurance presents a related problem when protection and investment are bundled into products that buyers struggle to value. Better product design and disclosure can improve household balance sheets without a large fiscal cost.
India also needs to recognise how work itself is changing. Global freelance platforms allow engineers and other professionals to sell services directly across borders. Such work could eventually support sizeable livelihoods. Tax collection, social security and labour regulation were built around firms and payrolls. They fit cross-border individual contracting poorly.
Public policy has spent years supporting the poor and facilitating wealth creation at the top. The large group between them has faced weaker wage growth, fewer secure jobs, rising private costs and heavier debt. The next round of economic policy needs to address that flat line.
This article is written with inputs from an EGROW Foundation discussion.