It's Official – India's Middle Class Has Stopped Buying Stuff

In the run up to the Lok Sabha elections, I did what every good journalist does – I surveyed cab drivers to gauge the political mood. In my case,it was Uber drivers to be more specific.One thing that struck me was that Uber auto-rickshaw drivers were consistently more pro-Modi, while Uber cab drivers were exactly the opposite. And this was true irrespective of which state they hailed from.The latest official consumption survey explains why that should have been the case.An Uber cab driver in Gurugram, where I live and commute, earns about Rs 40,000-50,000 per month after paying for expenses. An Uber auto-rickshaw driver earns about Rs 25,000-30,000. At this level of income, savings would be negligible. It is more likely that they have loans to pay back. It would, thus, be safe to assume that they spend whatever they earn on food, rent, health, clothing, the durables they buy, and whatever little entertainment they can get.There is one other key difference between Uber cab and auto-rickshaw drivers in Gurugram. Cab drivers are more likely to live with their families, while auto drivers have families living back home in their village.This may indicate that cab drivers are affected more by urban inflation than auto drivers – and are less likely to live off subsidies than the families of auto drivers.What does all this have to do with the latest Household Consumption Expenditure Survey (HCES)? It tells us why an Uber cab driver might be unhappy with the Narendra Modi government, while an auto driver might be very happy.That is because families in towns and cities, who spent about Rs 40,000 per month in 2023-24, actually saw a drop in their real consumption levels by half a percent.This is if we take the official retail inflation figures to be accurate. Anecdotal evidence shows that urban retail inflation is underestimated. If that were to be true, then real consumption levels of people like Uber cab drivers, would have shrunk significantly in 2023-24 as compared to the previous year.On the other hand, families that spent Rs 20,000-25,000 per month – like Uber auto drivers would have – saw their nominal consumption levels shoot up by 13 percent, and their real, inflation-adjusted, consumption levels grow by a healthy 7 percent in one year. If they sent half the money home, their family’s real consumption levels would also have gone up 8-9 percent.Not Just Popcorn: Bizarre GST Rates Are Eating Into Middle Class' SavingsThese figures also explain why consumer goods companies have been consistently complaining about the slowdown in urban demand. When the poor do better, they spend almost all their extra income on eating better. They don’t really move the needle on the overall demand for consumer goods and services.Most of that consumption comes from the richest 10-15 percent of urban households. That is where the HCES data paints a somewhat dismal picture.But before I proceed, let me unpack the data and adjust it for its obvious inconsistencies. I am pointing to the huge gap between the aggregate consumption levels that the HCES points to and what our gross domestic product (GDP) data shows. If the HCES is correct, then the total household consumption expenditure in India was about Rs 93 lakh crore in 2023-24. This is about half of the Private Final Consumption Expenditure (PFCE) estimated to calculate GDP in that year.Ensuring the Credibility of India’s GDP EstimatesHow do we explain this huge gap? One possible explanation is that the PFCE number is grossly overestimated. It is likely to be 30 percent less. But even if we accept that, overall household consumption in GDP data would have been about Rs 124 lakh crore last fiscal – still about a third more than what the HCES indicates.This suggests that the HCES has underestimated consumption levels at the top of the pyramid, especially in urban areas. This should not surprise anyone.It is very hard to get the affluent to participate in such surveys, so they are undersampled. That is why the HCES says the richest 5 percent of urban Indians spent just Rs 20,300 per month in 2023-24.This is clearly a very low number. Estimates by the World Inequality Lab suggest that India’s richest 5 percent – who are overwhelmingly urban – had a household income of about Rs 2 lakh per month in 2023. Taking an average household size of four people, that works out to Rs 50,000 per person. If we assume that such households saved 30 percent of their income, their average consumption would have been roughly Rs 35,000 per month. That is 1.7 times what the HCES estimates.Consumption Data Indicates Vanishing Middle-Class & Struggling Low-Income ClassOn the other hand, if we assume that the richest two percent of urban Indians didn’t participate in the household consumption survey, then we get a figure close to what the HCES estimates. Again, using the World Inequality Lab's estimates, we find that families between the 93rd and 98th percentile would have earned about Rs 1 lakh per month on an average, and probably spent 80 percent of it. That would bring us the Rs 20,000 per capita monthly consumption figure of the HCES.We can safely call these people the urban ‘middle class,’ whose monthly family incomes range from Rs 60,000 to Rs 1,20,0000.If the latest survey data is correct, ‘middle class’ consumption levels have completely crashed. In 2022-23, their average monthly consumption was Rs 20,824. This dropped to Rs 20,310 in 2023-24, down 2.5 percent. Add the impact of inflation, then real consumption dropped by a whopping 7.5 percent. Again, this is based on the official urban retail inflation figure. In reality, given the surge in house rents across urban areas in the past two years, the real drop in consumption in this segment is likely to be 10 percent.And this was in 2023-24. This year, if the earnings declared by consumer goods companies is anything to go by, the situation for the middle class is even worse. Commentary from companies, ranging from the FMCG giant Hindustan Unilever to food delivery and quick commerce major Zomato, is collectively – and universally – pointing to a slowdown in urban consumption. And unless the ‘middle class’ gets tax breaks in the upcoming Budget 2025-26, leaving more cash in their hands, this slowdown will only continue.(The author was Senior Managing Editor, NDTV India & NDTV Profit. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)

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It's Official – India's Middle Class Has Stopped Buying Stuff

What does a drop in real consumption levels of urban households tell us about the political mood of Indians?

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