Why India's Middle Class Is Stuck? - Saurabh Mukherjea

Between Rs 5 lakh and Rs 1 crore, Saurabh said, the vehicle has completely stopped. Zero movement in earnings for 10 years. But inflation is eating them alive at 7-8% per annum.

The Author and Founder of Marcellus Investment Managers was walking through his analysis of India’s income distribution data over the last decade. India’s middle class has not been slowly squeezed. It has been frozen in place while both the bottom and the top of the distribution moved.

The Kunal Shah Reference Point

The conversation began with a specific data point.

I remember this statistic report from 2022, Saurabh said. It was written by Kunal Shah. He posted this in 2022. The statistic stated that 90% of the population earns less than Rs 25,000.

Kunal Shah is the founder of CRED. His 2022 post about India’s income distribution had gone viral because it captured a reality that most urban professionals rarely think about. Nine out of ten Indians earn less than Rs 25,000 a month.

The Definition Problem

Saurabh’s first move was to challenge the standard definition of middle class.

There are two aspects, he said. First, middle class should be in the middle. That is the basic definition.

That is the intuitive part. The middle class sits between the poor and the rich.

But Saurabh added a second criterion.

Middle class should also account for the majority of income earned in the country, he said. Why write a book about middle class if their earnings are just a small part of India’s total income?

This second criterion changes everything. If you define middle class narrowly - say, Rs 5 lakh to Rs 25 lakh annually - you may have picked people in the middle of the income distribution. But their combined earnings will be a tiny fraction of India’s total.

For the middle class to matter, it has to be large enough that its combined earnings represent the majority of the country’s income.

The Bell Curve Problem

The next question is whether both criteria can be satisfied simultaneously.

In an equal society, Saurabh said, like Sweden or Norway, where the distribution is reasonably equal, you could just take the 25th percentile to the 75th percentile. They would be in the middle. And their combined income would be the majority of the country’s income.

But India is not Sweden or Norway.

India’s income distribution does not fit a bell curve, Saurabh said. On one side, Mukesh Ambani and Adani are sitting. On the other side, as Kunal Shah says, there are crores of small small people.

The Indian distribution is bimodal, or more accurately, extremely skewed. A small number of ultra-high earners hold a disproportionate share of the income. A very large base of low earners holds a very small share.

Where Middle Class Actually Sits

Saurabh then worked through the arithmetic.

If you want to define middle class as half the income, he said, starting from Rs 5 lakh, your top end does not end at Rs 25 lakh. It does not end at Rs 50 lakh either. Because Mukesh Ambani and Adani earn so much that you cannot pull half the country’s income at Rs 25 lakh.

The billionaire weight is so massive that any middle class definition ending below Rs 1 crore fails to capture half the country’s income.

You have to stretch it to Rs 1 crore, Saurabh said. Then Rs 5 lakh to Rs 1 crore gives you 50 to 53% of the income.

The middle class of India, defined as the group whose combined earnings equal half the country’s income, is people earning between Rs 5 lakh and Rs 1 crore per year.

The 10-Year Data

Then came the finding that gives the segment its punch.

Under the Government of India’s income tax data, Saurabh said, look at the last 10 years. Who has grown by how much? You will see a very interesting picture.

Below Rs 5 lakh - the 90% of India that Kunal Shah described.

Their income has grown at around 3-4% per annum, Saurabh said. Which roughly covers inflation in our country.

The bottom 90% is running to stand still. Their income growth is matching inflation. In real terms, no gain.

Above Rs 1 crore - the country’s wealthy.

Their income has grown at 10, 15, 20%, Saurabh said. Their life is completely set. Their income is growing like a rocket.

The top group is compounding rapidly. Their income is far outpacing inflation.

The reason Saurabh gives for the top group’s growth is the asset base.

Because they have built assets, he said. They have built their business. They are running a business in the market. They are earning in the stock market. They are earning from real estate. Their money is making money.

The framing that follows is the one that will stay with listeners.

They are our country’s kings and queens, Saurabh said, the ones above Rs 1 crore. Most of us are their servants.

The Middle Band

Then Saurabh delivered the finding.

Between Rs 5 lakh and Rs 1 crore, he said, the vehicle has completely stopped. I put 10 years of data. I showed that under income tax data, between Rs 5 lakh and Rs 1 crore, there is no movement. No movement.

This is the middle class of India. And it has been frozen in place for 10 years.

The poor, Saurabh said, their money, their income is also growing. The rich, above Rs 1 crore, their money is running. But between Rs 5 lakh and Rs 1 crore, you are completely hammered. No growth in income at all.

The inflation pressure makes it worse.

Inflation, for the people watching this podcast, is growing at around 7-8% per annum, Saurabh said. Life expenses are growing at 7-8%, but income growth is zero. Zero.

Compound zero income growth against 7-8% inflation for 10 years. The middle class has lost roughly half its purchasing power over the decade.

What The Data Reveals

Three specific insights from Saurabh’s analysis are worth sitting with.

The three-speed reality. India does not have one economy. It has three. The bottom 90% is matching inflation. The middle class is losing to inflation. The top group is compounding above inflation. Three different economic experiences within one country.

The definition problem. The traditional middle class definition - people in the middle of the income distribution - does not describe an economically significant group in India. To describe a group that matters, you have to define middle class as Rs 5 lakh to Rs 1 crore.

The asset gap. The reason the top group compounds while the middle stagnates is asset ownership. The rich have assets that generate income independently of their labor. The middle class has labor income only. When labor income does not grow, they have no compounding mechanism.

The Universal Insight

The Saurabh framework is not just about Indian numbers. It is about a specific structural feature of modern economies.

Countries that had industrial-era distributions had a strong wage-earning middle class. Manufacturing jobs paid enough that most workers could accumulate savings, build homes, and participate in the growing economy.

The current pattern is different. Wage-earning has stagnated in real terms across many countries. Asset-owning has produced most of the growth. The people who bought equities and real estate in 2015 have compounded at double-digit rates. The people who only had labor income have not.

India is showing this pattern in a more extreme form because of the specific concentration at the top. But the underlying dynamic is global.

The Political Economy

The framework also has political implications that Saurabh does not directly explore but which are worth acknowledging.

A country whose middle class income is frozen for a decade develops political pressure. The middle class is the group most likely to organize, protest, and vote based on economic frustration. They are also the group with the highest expectations for social mobility. When mobility stops, the frustration compounds.

The bottom 90% is often too focused on subsistence to organize around economic policy. The top 1% has direct access to policy makers and does not need to organize.

The middle class is the swing group in most democratic economies. Their economic frustration eventually finds political expression.

The Real Question For Readers

The uncomfortable question the segment raises is which band you are actually in.

If your income is above Rs 1 crore and growing at 15-20%, you are in the group Saurabh calls the kings and queens. You are compounding.

If your income is below Rs 5 lakh, you are in the 90% that Kunal Shah described. You are staying afloat.

If your income is between Rs 5 lakh and Rs 1 crore, you are in the frozen middle. Your labor income has probably not grown in real terms for 10 years.

The Saurabh framework does not prescribe a fix. But it does describe what many middle-class Indians already feel without being able to articulate. The reason things feel harder is not because you are working less or spending more. It is because the arithmetic of your income against inflation has quietly turned against you.

The specific implication for anyone stuck in the middle band is worth sitting with. The way out is not more labor. It is asset ownership. The compounding mechanism the top 1% has access to is what the middle class has not yet built.

Watch the full episode here: