A Federal series on three decades of reforms
In this part of our ongoing series on reforms initiated by the Narasimha Rao government in 1991, we look at how the world fell for the myth of the Indian consumption class.
Liberalisation and the making of 'middle class' myth
Uploaded 7 August, 2020
One of the popular buzz-phrases post-1991 was ‘Middle Class’. In terms of its size and composition, India’s consuming class proved to be contentious and controversial. No one was ever sure about its contours and capabilities.
During the 1980s, as is the fashion now, hundreds of expatriate CEOs and managers circulated in and out of India. The two prime ministers, Indira Gandhi and her son, Rajiv, had eased rules related to foreign tie-ups. The stock market was on fire; it propelled every Tom, Dick, Jane and Mary of an entrepreneur to forge such partnerships to raise money from the bourses. As business journalists, we had a standard question for the visiting CEOs: What was the size of the Indian market?
The answer depended on what the companies wanted to hawk. If it was a swanky Japanese 100 cc bike, the expat would speculate, “If a mere 1% of Indians bought bikes every year, we would be happy with a 20-25% market share.” If it was a cheaper product, the pin-striped CEO would merely substitute ‘1%’ with ‘10%’. The percentages boggled our minds. Given India’s population of almost 700 million (1981 Census), they translated into annual sales of 7 million and 70 million.
We knew that the numbers were bogus, a figment of the expats’ imaginations. But, like experts, institutions, and policy-makers, we played ball. For the record, the yearly sales of motorcycles crossed the seven-million mark in 2009-10. However, the scenario changed in 1991. As India embarked on the reforms path, it became imperative to quantify the size of the consumption class. There was an urge to give a realistic estimate of the expanse of the country’s middle class.
In any capitalist-liberal democracy, the middle class forms the skeleton, which supports the societal edifice. The idea behind reforms is to create a wealthy and stimulating middle class that can drive a nation towards higher levels of prosperity. Politically, this section forces transparent governance. Socially, it strives for equality. Economically, as millions transit from being poor to becoming a part of the middle class, the process leads to high growth rates, and huge consumption.
Sadly, the numbers game led to confusion and manipulations. The dimensions of the middle class were initially exaggerated, as if clutched out of an economic rabbit’s hat. The balloon was then deflated, as the hot air went out of it. In recent times, there is a tendency to swing from one extreme to another one. More importantly, the process turned out to be a myth-making exercise. Even today, three decades later, there is no consensus on the extent of the Indian Middle Class.
The 1990s were defined by a sense of delusion, which was backed by seemingly-concrete calculations. Media reports quoted the figures doled out by the NCAER, a think tank that pioneered the measurement of the middle class. Apparently, in 1989-90, more than 40% of the population could be qualified as middle and rich classes. Given India’s population of almost 850 million (1991 Census), this implied 350 million consumers. By 1995-96, the percentage climbed to 80%, or 680 million.
To be fair to NCAER, it was to be partially blamed for the euphoria. Its figures in 1989-90 and 1995-96 included a qualification. A sizable portion, 27% and 26.7%, respectively, was grouped as “low income”, as opposed to “middle income”, “upper middle”, and “high income” ones. The “low income” sub-group, although different from the poor, couldn’t buy a car. Even if this percentage was left out of the consideration, the middle and rich classes comprised 450 million people in 1995-96.
These were awesome, jaw-dropping, and salivating figures. In her book, We Are Like That Only (2008), marketing consultant Rama Bijapurkar, quotes an expert, “The story put out (in the early 1990s) was that there was a sleeping beauty called Middle Class India, comprising 250 to 300 million people, who had money and a burning desire to consume, and nothing decent to buy.” This economic class only awaited the influx of new brands, and it would queue up to buy them.
There were two reasons for this unfounded optimism. The first was deliberate. India joined the reforms party after China, Asian Tigers (Korea and Taiwan), and Latin American nations. Thus, there was an obsessive compulsion to embellish the Indian numbers to woo investors. The second seemed logical. Since Indians were starved for brands in a socialist regime, there was an enormous pent-up demand that was waiting to be aroused and tapped.
By the early 2000s, the party ended, and left those who were drunk with the middle-class spirits with a hangover. There was a sober realisation that this was a dream that turned into a nightmare. As Bijapurkar wrote, “The truth is that the Great Indian Middle Class was a seductive idea that was conceived, packaged, and sold to the world by India as part of its sales pitch....” According to a 2006 report by Hansa Research, “In fact, no one really has a fix on the nebulous entity called the middle class.”
In 2009-10, NCAER said that the middle class comprised 150 million people, apart from the 20 million who were rich. Over the next decade, there were vast discrepancies between the data. Beauty lies in the eyes of the beholder, and a glass can look as half-empty or half-full to different observers. In a similar vein, the middle class seemed like a mirage in the development desert to the optimists, and an illusion of an oil slick on the growth highway to the pessimists.
One study said that only 6% of the population could be considered as middle class in 2011-12. Another one (2012) hiked it to 10%. Credit Suisse Global Wealth Report (2015) found that not more than 25 million individuals could be rated as middle class. In 2018, Economist published a piece, The Elephant in the Room, which put the figure at 78 million. An article in Economic and Political Weekly (2017) maintained that the size of the Indian middle class was indeed ‘Great’ – 600 million.
Such yawning contradictions look irreconcilable. But three factors can explain the differences. The first is income versus wealth. Some reports, like NCAER, were based on incomes. These did not account for disposable incomes that earners could spend on discretionary spends, like a car or a foreign trip. As an expert succinctly said, “Consumption is like maternity, a certainty. Income is like paternity – merely a matter of inference.” The two may or may not converge.
Wealth, added the Credit Suisse report, “conforms better to the widespread view that the middle-class membership is resilient to temporary setbacks”. One cannot lose it if one is sacked from a job, and still possesses material assets. But ownership of assets can also lead to inconsistencies. One survey found that 20% of families owned three or more of these five assets – vehicle, TV, laptop or computer, cooler or AC, and refrigerator. The figure doubled if one considered two or more assets. So, which one is the actual middle class – 20% or 40%?
The second factor is the multiplication constant. Some studies look at families. Others consider individuals. In both cases, one needs to take into account the average family members, or average dependents of a person, to reach the correct figure about the size of the middle class. In India, this constant is considered to be five. However, this leads to complications. In middle-class families, both spouses may be earners, and opt for nuclear families. Similarly, a middle-class person may live alone, and not support his family.
In either case, the use of the constant (five) may hike the numbers. At the same time, if no constant is used, and only the individuals who earn certain incomes or own specific assets are counted, the figures may show a more dismal picture. In this context, does the Economist estimate imply 78 million (without a multiplication constant), 195 million (constant of 2.5), or 390 million (five)? Isn’t the last figure closer to the 600 million that was mentioned in the EPW piece?
Finally, more misunderstanding was inculcated into the calculations because of the new sub-categories. In the past three decades, the “low income” or “low middle” in the earlier NCAER studies became re-constituted as “aspirers” and “strivers” in the subsequent and other ones. Suddenly, the usage of these terms catapulted them from being consumers of essential items to those who desired to act and behave like the middle class did. Since they aspired and strived, they could elevate themselves soon in terms of incomes and wealth.
A combination of confounding income with wealth, illogical and random use of the multiplication constant, and the inability to discern between aspirers/strivers and the actual middle class, muddied the middle-class waters. Anyone and everyone could be considered as middle class, or ejected out of it, based on the whims and fancies of the experts. The idle-class wand became the economic conjurors’ best friend.