India’s middle class grew sevenfold, but salary growth remained weak, data show

Ten years of tax return data shows middle India’s headcount has jumped over seven times, but within that band, the average salary has barely moved.

If you felt that your salary has been stagnating over the past few years, there is now data from the income tax filings that turns the feeling into a fact. Middle India in the tax-included formal sector has expanded, but the average person within this band has barely seen salaries rise for the decade ending 2022-23.

Efforts to formalise and widen the tax net are working. But, unless average wages go up for individuals, consumption will begin to drag. (HT archieve)

Of course, those moving up the income bands have done better, but the average person in this band has not gained much. Also upending the inequality narratives, the rich, on an average, have not got richer in terms of salary incomes. But the lower income cohort has been the biggest average salary-gainer over the decade.

The most striking story evident from the Income Tax Return Statistics for FY13 and FY23 released by the income tax department is one of formalisation of the Indian economy. I examine the salary tax filing of individuals. While nominal (real plus inflation) gross domestic product (GDP) grew at around 10.5% a year over the decade, the total salary growth for all individuals has been an impressive ~16% a year. But the average salary of all individual income-tax filers grew by only about 6.5% a year over the decade ending FY23.

Middle India is expanding. The number of returns filed by this cohort rose seven times over the decade, the fastest amongst the three cohorts of salary income. (Representative)

Who is growing? The middle class. If we define the middle class as the section that has salary incomes between ₹10 and 50 lakh a year, this cohort has substantially increased its share of salary income over the decade. From just over a quarter in FY13, it now earns almost half of all salary income earned in FY23. A decade ago, salary incomes less than ₹10 lakh had a two-thirds share of total income — this has changed dramatically in just 10 years.

A short note on how taxable income is calculated. It is divided into five heads ­- salary, income from house property, income from business, capital gain, and other income. I am looking at three income cohorts for individuals (not firms or Hindu Unidvided Family or any other tax-filing category) — those with less than ₹10 lakh income a year, between ₹10 lakh and ₹50 lakh, and above ₹50 lakh.

(I have removed the zero tax- payers for the ₹10 lakh and below slab as it was reducing the average salary needlessly.)

Middle India is expanding. The number of returns filed by this cohort rose seven times over the decade, the fastest amongst the three cohorts of salary income. But, it is not earning more per person on an average. Average salaries grew from ₹16.86 lakh in FY13 to ₹17.33 lakh in FY23 — a less than 3% growth over the decade and an average annual rate of growth of less than 0.3% a year. The growth is in the pie, rather than the size of the slice. The impact of inflation and taxes blunts this growth in real terms, making purchasing power suffer.

What could cause this huge jump in the middle class? Possibly an upward mobility of the lower salary cohort and a rise in the number of people with formal-sector salaried jobs. So, both better jobs and fomalisation of informal jobs are the most likely reasons for this growth. While this is good news for many reasons — as a growing middle class is the backbone for long-term economic growth of a nation — the bad news is that though India is formalising, the bargaining power of labour remained weak despite rapid formalisation. This is a sign of a labour-surplus economy; the pressure on wages for middle India is now showing up in the tax data.

Have the rich got richer? The answer is no, despite what the anecdotes and outliers will project. Their average salaries dropped 10% over the decade, while the total salary income grew by 20% a year. This might sound difficult to digest, but here is what happened. The total number of people filing returns in this band went up by almost seven times, while the total salary income went up by just over six times. Then, did the rich do better on income from house property and profits from assets? Again, no. While the pie grew larger, the average number is actually lower.

The big surprise is the growth of average income in the bottom cohort, despite some recent inequality studies painting a darker picture. The tax return data tell a more nuanced story. Those with salary income up to ₹10 lakh a year have actually seen the highest growth in average income when compared to the middle class and the rich. Average salaries grew 32% for this cohort over the decade taking average salary up from ₹3.87 lakh to ₹5.10 lakh — a growth rate of almost 3% a year.

But, how can the overall salary average be higher than all the three cohorts? The overall average rose because millions of taxpayers moved into higher salary bands. But once we compare taxpayers within the same salary band, average salaries were almost flat.

What can middle India do? Just skill up. The potential for low-hanging productivity gains is far higher in India, than say a US (Representative)

The full story is this: The pie is expanding, the country is creating more formal sector jobs, and more people are coming into the tax net. None of the three cohorts experienced average salary growth commensurate with the rapid expansion in total salary income. Nearly all of the increase came from more taxpayers entering the system rather than existing taxpayers earning substantially more within the band.

For policymakers, it is clear that efforts to formalise and widen the tax net are working; this must continue to gather in more. But equally, unless average wages go up for individuals, consumption will begin to drag. And that usually goes into a downward loop, with lower production, layoffs and even lower consumption. Right now the sheer volume is keeping it going, but at some point the wage upgrade will need to kick in for sustained high growth.

What can middle India do? Just skill up. The potential for low-hanging productivity gains is far higher in India, than say a US. Your individual real wage growth is in your hands and most often the way up is zig-zag — usually by switching jobs. Increments in the same place of work, for some reason, are always difficult. Update your resume at least every quarter and if you find you have nothing to add, take it as a red flag. Barring few, there is no “family” firm. It is a contract. Get a better job. Move.

(Monika Halan is the best-selling author of the Let’s Talk series of books on money. The views expressed are personal)