India's middle class is expanding, thanks to rapid urbanisation. This will reshape the economy.

Rajesh Shukla    July 23, 2023

OPINION I The Economic Times

Nearly thirty years after India’s Middle Class rose to a considerable size, the decade of 2020s is witnessing an exciting new trend. The Middle Class is currently the fastest-growing segment of India’s income-earning population. In 2021, this segment, which is classified as households with family incomes of between Rs 5 lakh and Rs 30 lakh, numbered 91 million households, representing 30% of all Indian households. Growing at an annual rate of 6.3% per year by 2031, this figure is set to rise to 165 million households by 2031 or approximately 46% of all households.

Apart from the sheer size, the growth of the Middle Class is ushering in changes at multiple levels which will significantly impact the socio-economic profiles of our cities, states and ultimately the collective economic prowess of the nation.

In the early 1990s up until the first decade of the 2000s, the increase in Middle-Class households happened largely in the metros and Tier I cities of India. But since then the trend towards urbanization has been picking up pace and as a result, we are beginning to see an uptick in prosperity levels. During the five-year period (2016-2021) the Middle-Class segment has grown significantly in cities with populations of 1 to 4 million.

In the South, boom towns such as Malappuram, Kozhikode, and Kochi have recorded a much higher than average rate of growth of Middle-Class households. Raipur, Tiruppur, Indore, Bhubaneswar and Ranchi are among the dark horses that have raced past others in growing their Middle-Class households. Also included in this club are historic centres that are entering into a new phase of growth and revival: Patna, Agra, Bhopal, Gwalior and Rajkot.

Significantly among the top ten fastest-growing Middle-Class cities, only two belong to the Tier I/metro cities -  Surat and Bangalore.

This rise in prosperity is expected to get a further boost as nearly 41% of people will become residents of urban India by 2031. The top nine metros and 54 boom towns will be significantly more prosperous than other urban centres.

Traditionally, the concentration of high-income households has been in states such as Maharashtra, Delhi, Tamil Nadu, Punjab, and Gujarat. As a group, these states have a higher rate of urbanization which is growing at about 43% compared to the national average of 35%. For some like Delhi, it is even higher at 98%.

Though these states have a large concentration of Middle Class and Rich households, the growth rate is slow. On the other side, states such as Uttar Pradesh, Telangana and West Bengal are witnessing a much faster rate of growth of Middle-Class households. There is a key difference though. While the growth of Telangana and West Bengal is largely fuelled by one urban centre - Hyderabad and Kolkata - in Uttar Pradesh, a number of towns are contributing to this growth. Among them are Kanpur, Saharanpur, Aligarh, Agra and Lucknow.

Another significant factor that has contributed to the growth of the Middle Class is the emergence of the Developed Rural clusters. About 150 such developed rural clusters are to be found across India of which nearly 41% are located near metro cities. Located on the peripheries of larger cities, these are not just extensions of the cities to which they are attached. But, in terms of socioeconomic profile and consumption patterns, too, they mimic urban trends. Developed Rural households are earning and spending significantly more than boom town households.  These households are engaged in non-agricultural work and are mostly employed in the services and retail sectors.

The expansion of Middle Class and high-income segments is reshaping consumption. It is helping India evolve into one of the world’s most dynamic consumption environments thereby providing the base for sustained economic growth. These two segments are expected to drive nearly $2.7 trillion of incremental consumption spend by 2030.  As Middle-Class households move up the income ladder they will spend more on apparel, communication, transport, personal care and entertainment.

Consider the case of the newly minted Middle Class in the Developed Rural clusters. The penetration for categories such as two-wheelers, mobile phones and Internet connections is higher in the Developed Rural cluster. This is not surprising as last-mile connectivity is a key factor which is fueling the purchase of two-wheelers. With the service sector and digital economy on the rise, usage of mobiles and Internet connections become critical for these households.

Saving patterns too are expected to change dramatically. Middle-Class households spend four times more than lower-income households on insurance products while rich households spend three times more than that of Middle-Class households.

India is on the cusp of a tremendous opportunity for both economic progress and improvement in the general well-being of its citizens. A faster pace of urbanization is creating new pockets of prosperity both in urban and rural areas. The changing economic geography of India is bound to reveal exciting opportunities as well as challenges for marketers in the coming decades.