The growth roar of Middle India

Tax data shows India’s journey towards becoming a middle-income country

Data released by the Income Tax Department last week had some points of headline news, but hidden in the pdfs were stats that, when analysed, show the growth roar of the Indian middle class. The headline numbers map the rise in income tax returns which have more than doubled starting financial year 2011-12 and ending 2020-21. They also map the rise of the super-rich, with 589 taxpayers filing a return with a gross total income of more than ₹500 crore. However, an analysis of returns data of salary income earners shows a trend of over 20% average annual growth of those earning between ₹5.5 and 25 lakh a year over a nine-year period. This is an over five-fold rise in the salaries of this cohort.

The graphic shows the growth of salary income according to income slabs over this period. (File)

The graphic shows the growth of salary income according to income slabs over this period. The data clearly shows two things. One, there is both growth and formalisation of the economy. With nominal (real growth plus inflation) Gross Domestic Product (GDP) growth at around 12%, the growth rates of salaries above this level potentially point to a rise in both the number of people earning this income and in those reporting it. One of the biggest jumps is seen in the income band of ₹9.5 lakh to ₹10 lakh a year, which saw an average annual growth of 23%, going from ₹9,760 crore to ₹62,684 crore.

This looks very much like the salary band of a white-collar worker with a couple of years of experience. UpGrad, the educational fintech, puts the starting salary of an MBA at between ₹5 lakh and ₹8 lakh per annum, while those with some experience can expect between ₹10 lakh and ₹18 lakh per annum; at a mid- to senior-level this rises to between ₹30 lakh and ₹50 lakh a year.

In terms of sheer volume, the entry-level salaried worker who earns between ₹5.5 lakh and 9.5 lakh a year has seen a growth of 19% over the same period. This cohort began with earning a collective ₹1.4 trillion in 2011-12 that ballooned to ₹6.8 trillion in 2020-21, an almost five-fold rise.

Two, a climb up the income ladder is visible. The graphic shows the biggest gains in income have taken place between the income levels of ₹5.5 lakh and 25 lakh over the period. A collective ₹2.8 trillion became ₹14.5 trillion, just over a five-fold rise. One of the highest growth rates was seen in the income band of ₹25-50 lakh, 23% annually on average, turning an aggregate of ₹0.4 trillion into ₹2.65 trillion.

Middle India is clearly exhibiting a growth spurt. But how do we define the middle class? While there is no consensus on how to classify a middle-income Indian, the research firm People Research on India’s Consumer Economy (PRICE) pins this band down to those earning an annual income between ₹5 lakh and ₹30 lakh, with aspirers earning between ₹1.25 lakh and ₹5 lakh and the rich earning over ₹30 lakh a year. This definition clearly maps the growth in the rise of income firmly in the band of ₹5.5 lakh and ₹25 lakh, with growth levels over 20%.

The current analysis actually understates the roar of middle-class growth as it does not account for income from the other four sources. Gross total income in India comprises income from salary, income from business and profession, income from house property, capital gains and other income (this includes income from interest, for example).

If we include that, the picture might look even stronger for those mature middle-class families which have built assets and the growing influence of gig workers whose income will get mapped under the head of business and profession.

But is this growth coming with greater inequality? The highest growth of 24% in income has been for the income cohort between ₹25 crore and ₹50 crores and those earning above ₹10 crore a year are seeing a growth of over 20% as a cohort. While it does look like the rich are getting richer, India is not showing signs of growing inequality. In fact, it is the reverse. We look at a measure of equality called the Gini Coefficient which measures the relative inequality of a country.

A value of 100 means that one person has all the income and the rest have nothing. A value of 1 means perfect equality. Usually, a Gini of below 40 is seen to be an acceptable level of inequality. World Bank data shows the Gini for India falling between 2011 (the data for 2012 is not available) and 2021 from 35.7 to 34.2.

The number for China is 37.1, Brazil is 52.9, the United States is 39.8 and South Africa is 63. Indian growth, it seems, is impacting all segments of the population. The rich are better placed to grow, but the relative inequality is not getting worse. The income distribution approximates a normal bell-shaped curve.

There is ample anecdotal evidence of the rise of Middle India, but now we have the data. If India can sustain the real growth momentum of between 6% and 8% a year for the next decade, the gigantic boat that has lifted most people out of extreme poverty will now sail towards a 2 BHK comfort of a middle-class life.

The rich will get richer, poised as they are with a larger asset base, but as long as overall inequality does not rise, there is nothing to quibble about. Remember that there are no perfectly equal societies and those that have tried to create one have ended up with their own share of caviar Communists.

Monika Halan is the author of the best-selling book Let’s Talk Money. The views expressed are personal