July 5, 2023

PRICE Survey validates the government’s service delivery efforts

Prof. Arvind Panagariya

Excerpts from Panagariya's Guest of Honor speech on the release of PRICE’s report “The Rise of India’s Middle Class”

In the late 1980s or early 1990, before the 1991 reforms, Dr. Abid Hussain, a notable advocate of liberalization within the government, authored a pivotal report in 1984 on trade liberalization. Many subsequent trade liberalization efforts in the 1980s can be attributed to his influential report. Around the same time, India transitioned from Prime Minister Indira Gandhi to Prime Minister Rajiv Gandhi, with Rajiv Gandhi being a significant driver of liberalization. His address as India's Ambassador to the United States in 1990 at the World Bank inspired many, including myself, although I initially held a skeptical and pessimistic outlook.

I conveyed my concerns to Dr. Abid Hussain about the entrenched license permit system within Indian politics and bureaucracy hindering liberalization efforts. His response, however, emphasized the role of India's middle class in propelling liberalization. He expressed strong faith that the middle class would exert pressure on both the political and bureaucratic fronts. This belief was vindicated when the 1991 crisis unfolded, leading India towards liberalization within a year.

Dr. Abid Hussain's conviction marked my first encounter with a focus on the Indian middle class's significance. Economic discussions often prioritize poverty and inequality, with growth only gaining prominence later. It was Prime Minister Vajpayee who later championed growth, underscoring its role in eradicating poverty through double-digit growth targets. This marked a turning point.

Returning to the concept of the middle class, historically, it represented the segment between the nobility and the peasantry. Dr. Abid Hussain's emphasis on the Indian middle class as a catalyst for change underscores its pivotal role in shaping the nation's trajectory.

We're discussing the middle class, primarily as an economic concept based on income levels, which has some overlap with the social definition. Regarding the study, I'd like to share a few thoughts before delving into the issues.

The survey seems meticulously executed, though I'm not an expert in assessing surveys. From my initial examination of the results, I haven't identified any anomalies, a promising indication.

It's noteworthy that surveys conducted privately outside government circles sometimes yield questionable outcomes, fueling needless disputes. Survey conductors shoulder significant responsibility, ensuring credible and scientifically sound execution. Proper questionnaire design is vital to avoid producing nonsensical results that occasionally spark unwarranted controversies.

The survey's thoroughness is evident when addressing income levels beyond ₹10,00,000, where sample sizes diminish, affecting analyses. They've employed techniques like Pareto distribution to manage this distribution's tail. Preliminary findings suggest a well-executed survey generating sensibly intuitive and plausible outcomes. These outcomes can corroborate data from other sources, such as the Periodic Labor Force Survey (PLFS), which I find reliable.

Surprisingly, the chosen middle-class income range of ₹5,00,000 to ₹30,00,000 per household at 2020-21 rates seems fitting, encompassing a substantial 91 million households or about 31% of the population. Predicting trends, while interesting, becomes less dependable as we extend further into the future, introducing greater variability.

By 2030, a reliable projection indicates a substantial rise in the middle class from around 31% to approximately 47% of the population. This transformation represents a significant portion of society. Additionally, the aspirer class, a precursor to the middle class, is expected to comprise 47%. When combined, these aspirer and middle-class segments account for about 83% of the population. This revolutionary shift is set to reshape India's societal fabric within a mere seven years, influencing consumption patterns, social discourse, and the nation's identity.

This impending transformation is truly monumental, and while some aspects may be progressing more slowly, the core shift is undeniably revolutionary. The study meticulously traces changes across different income groups from 2015-16 to 2021, capturing the evolving landscape.

The data reveals intriguing insights. The struggle remains concentrated at the bottom during this relatively short period of five years, from 2015-16 to 2021. The decline in the destitute population is marginal, just 0.6%. In contrast, progress is more notable as you ascend the income ladder. The middle class experiences robust growth, while the top income groups witness exceptional expansion. This pattern underscores that significant wealth accumulation occurs at the higher end of the distribution, subsequently influencing the overall economic landscape.

However, an important caveat is the impact of the COVID-19 pandemic in 2021. In urban areas, destitute numbers rise due to the pandemic's effect, which aligns with findings from the PLFS survey. This trend contrasts with rural areas, where poverty rates remain stable, attributed in part to the strong agricultural performance during the pandemic.

Moreover, swift government action in implementing redistribution policies played a vital role. The establishment of safety nets, including food distribution and cash transfers, effectively bridges the findings from your survey and the PLFs analysis we've conducted. Some privately conducted surveys can exhibit bias, as seen post the Swachh Bharat mission. These surveys may selectively focus on poorly performing states, creating a skewed perspective. However, your comprehensive survey approach avoids this pitfall, providing reliable and well-rounded data. Your survey's comprehensive coverage yields plausible figures, exemplified by specific instances. The data presents heartening outcomes. This meticulous approach ensures a trustworthy analysis, reinforcing the credibility of your survey.

The comprehensive PRICE survey assesses household amenities like tap water, LPG, toilets, and electricity. Notably, it independently validates the government's service delivery efforts by directly surveying households.

For tap water, piped supply reaches 30% among the destitute and climbs to 48% for aspirer households, further increasing to 69% for the middle class and 75% for the affluent. Turning to LPG access, a commonly debated topic, the survey contradicts claims that initial LPG provision isn't followed by sustained use. Among the destitute, 69% use LPG, ascending to 78% for aspirers, 91% for the middle class, and an impressive 97% for the wealthy. These numbers highlight significant progress.

Surprisingly, even among the destitute, LPG usage is remarkable, reaching around 70%. Shifting to toilets, the destitute have nearly 80%, aspirers 90%, the middle class 96%, and the affluent 97%. These figures surpass state-specific surveys, confirming the government's claims independently.

Electricity access follows a similar pattern: 83% for the destitute, 89% for aspirers, 93% for the middle class, and 95% for the affluent. Such strong alignment with household service data is uncommon and impressive.

One intriguing question remains about India's slower urbanization despite consistent economic growth of about 7% for nearly two decades. Other countries growing faster, like South Korea, Taiwan, and China, have experienced swifter urbanization. Could this survey uncover insights into this puzzle? This query connects with points highlighted by Mr. Kant, possibly shedding light on this phenomenon.

Furthermore, there's the manufacturing puzzle, although it might not be part of this survey's scope. Despite efforts, manufacturing growth remains somewhat stagnant, which could hold key insights.

Numerous reforms have been enacted, although challenges remain such as pending labor law reforms and high land costs. Despite significant reforms, India's manufacturing sector, particularly in comparison to the IT industry, has not exhibited substantial growth. Notably, during Nehru's early tenure, industrialization propelled growth, with industrial expansion exceeding GDP growth at around 6-6.5%. Yet, in subsequent years, industrial and GDP growth have largely aligned, with industry's contribution to GDP remaining consistent. This stagnation presents a puzzling contradiction despite the removal of investment and import licensing and the relaxation of small-scale industries reservation.

The manufacturing conundrum persists despite substantial policy changes. The disparity between industry and IT growth raises questions about the factors restraining manufacturing's advancement. It's an intricate puzzle that defies easy explanation.

In the context of global demographic shifts, the survey's findings offer encouraging prospects. Worldwide, populations are aging, leading to a decline in the working age group (15 to 64) across major nations such as Europe, China, and the United States. Remarkably, India stands as an exception, alongside Africa, poised to contribute positively to this crucial demographic.

According to United Nations projections, from 2021 to 2040, India anticipates an addition of nearly 150 million individuals within the working age bracket. Given projected shortages elsewhere, India's burgeoning working population will essentially shape the global workforce. This transition aligns with the middle class expanding from 31% to 47%, and the combined aspirers and middle-class accounting for 83%. This demographic shift will play a pivotal role in the international migration pool, underscoring the need to enhance higher education. Transforming India's higher education system becomes vital to meet the demand for a skilled and educated global workforce, a pattern evident in migration to countries like the Middle East and the more developed nations.

In essence, this demographic evolution emphasizes the urgency of nurturing a skilled workforce, equipping India to define and lead the global workforce dynamics.

Elevate higher education by enhancing its quality and scale. This strategic reform is pivotal as India's role in shaping the global workforce intensifies. The Indian diaspora's higher acceptance in host countries, owing to our cultural adaptability, sets us apart. Despite discussions on anti-immigration measures, the robust workforce demand makes this flow difficult to curtail. Thus, prioritizing higher education gains further significance, aligning with both national and international imperatives.