India’s Middle-Class is Being Squeezed and the Policymakers need to Wake Up or be Woken Up

India, the world’s fifth-largest economy, (to become fourth-largest by 2026 and third largest by 2028) is at a crossroads. While its GDP growth garners global attention, the country’s middle class—the backbone of its consumer economy—is buckling under financial strain. Rising debt, stagnant incomes, and high inflation have left millions living paycheck to paycheck.

A Case Study: The IT Professional’s Plight

Ramesh, a 28-year-old IT engineer in Bengaluru, embodies the middle-class struggle. Earning ₹12 lakh annually, his salary hasn’t budged in real terms since 2015. With 65% of his income spent on rent, food, and his daughter’s school fees, he took a ₹5 lakh personal loan to cover medical expenses, paying 30% of his income in EMIs. Automation threatens his job, and upskilling courses cost time and money he can’t spare. Ramesh’s story, drawn from urban India’s reality, underscores the need for accessible retraining and financial safety nets.

Once India’s crown jewel. Today, it faces a 7% dip in hiring in 2024, with AI poised to further disrupt the job market (Business Standard). Freshers are joining at salaries unchanged for a decade, while experienced professionals see minimal growth. This stagnation reflects broader challenges in leveraging India’s talent pool.

The Definition of Middle Class

Who exactly is the “Middle Class”? Economists peg the middle class as households earning between ₹5 lakh and ₹30 lakh annually, roughly 30-40% of the population, or 400-500 million people. 

The Middle-Class Dilemma

• India’s middle class, roughly 30-40% of its 1.4 billion population, is caught in a vise of rising costs and stagnant incomes. Real wages have grown a mere 0.01% over five years, while food inflation, driven by weather shocks, hit 10.9% in October 2024. Analyst Saurabh Mukherjee notes that middle-class incomes, stuck at ₹10.5 lakh annually for a decade, have effectively halved in real terms when adjusted for inflation (Economic Times).

• This class is also grappling with increased household debt, which has risen from 35% of GDP in March 2020 to 42.9% by June 2024, according to the RBI data. Net household savings have hit a 50-year low, leaving many without emergency funds, as reported by CRISIL. This financial pressure has led to a slowdown in consumption, with some reports indicating stagnant sales of everyday items like soap and biscuits, though overall market data shows mixed trends.

• Many are borrowing to survive, with 65% of household budgets devoured by essentials like food, rent, and healthcare. Behavioral economics offers insight here: faced with stagnant incomes, families turn to credit to maintain lifestyles, a classic “present bias” that risks long-term instability.

• The job market presents further hurdles, with graduate unemployment rising from around 15% before Covid to 19-20% while the number of job-seeking graduates surged 20%, as per the State of Working India report by Azim Premji University. Even when jobs are available, salaries have stagnated—IT freshers today earn similar packages to those of a decade ago, with median salaries increasing only 40-45% over 10 years, less than inflation (The Hindu BusinessLine). The white-collar hiring dropped 8% in 2024-25, with IT seeing a 20-30% decline due to automation and generative AI. 

The result? A middle class with dwindling bargaining power, often enduring grueling hours (70-hour IT workweeks are not uncommon) and living “hand-to-mouth,” with no emergency funds or capacity for entrepreneurial risks.

The Economic Stakes: Why the Middle Class Matters

• The middle class is not just a demographic; it’s India’s economic engine. The middle class consumption accounts for 60% of GDP, and fuels demand beyond necessities, spurring job creation and poverty reduction. From 2003 to 2013, middle-class purchasing power roughly doubled, powering growth. Today’s slowdown threatens this dynamic. A 2025 Economic Survey warns that AI-driven job displacement and consumption declines could trap India in a low-income cycle, especially with only 30 years left to leverage its demographic dividend—a young workforce that will age by 2055.

• Global headwinds exacerbate the challenge. Potential U.S. tariffs under a new administration and volatile oil prices (India imports 80% of its oil) could push inflation beyond the RBI’s 4-6% target, further squeezing households. Domestically, manufacturing’s GDP share remains stuck at 17% despite “Make in India,” and infrastructure gaps deter foreign direct investment (FDI). The RBI’s tight monetary policy, with rates at 6.5% until a recent 25-basis-point cut to 6%, has curbed inflation but constrained credit growth.

Policy Missteps or Missed Opportunities?

• The 2025 budget includes tax relief for the middle class, but its sufficiency to address systemic issues is debated, as highlighted in various analyses (Budget 2025 document). The 2025 budget raised the tax-free income threshold to ₹12.8 lakh, a nod to middle-class woes, but critics argue it’s a Band-Aid on systemic issues. Corporate tax cuts in 2019 aimed to boost jobs, but critics claim they padded executive salaries more than payrolls. Middle-class income taxes and GST contribute significantly to revenue, yet infrastructure—roads, schools, hospitals—lags, discouraging FDI and burdening households. The RBI has cracked down on predatory lending, but job creation and structural reforms remain sluggish.

• Despite the ‘Make in India’ initiative, manufacturing’s contribution to GDP has declined from 16.7% in 2013-14 to 15.9% in 2023-24, as noted by the New Indian Express. This suggests that government efforts have not yet reversed the trend, raising concerns about economic strategy effectiveness. It’s like trying to build a skyscraper with a shovel—efforts are there, but the results are underwhelming.
  

• India benefits from a demographic dividend, with a large young working population, but experts warn that only about 33 years remain to capitalize on this, as per McKinsey report. The risk is that India could age before achieving prosperity, potentially getting stuck in a low-income trap, similar to challenges faced by Japan and Germany.

A Path Forward: Policy and Personal Resilience

• India’s middle-class crisis demands a dual approach: bold policy reform and individual pragmatism. The government must prioritize job creation through labor-intensive sectors like manufacturing and services, leveraging the Production-Linked Incentive (PLI) scheme to attract FDI. Upskilling programs, especially in AI and green technologies, can counter automation’s threat. Infrastructure spending, targeted at ₹111 lakh crore by 2025, must be executed efficiently to boost demand and investor confidence. Tax relief, like raising Section 80C deductions or lowering GST on essentials, could free up disposable income.

• Individuals, meanwhile, must act decisively. Behavioral economics suggests “nudging” toward long-term security: automatic savings plans, for instance, counter present bias. Term insurance and health insurance are affordable bulwarks against medical and mortality risks. Upskilling via online platforms like Coursera or Udemy, often costing under ₹10,000, can enhance employability. Diversified investments—tax-free bonds, sovereign gold bonds, or a 70:30 equity-debt portfolio—offer inflation-beating returns.

Key Citations

• RBI data on household debt and savings
• CRISIL report on household savings trends
• Statista data on food inflation in India
• Economic Times article on middle-class purchasing power
• IMARC Group report on soap market
• Fortune Business Insights on biscuits market
• Statista data on two-wheeler sales
• Autocar Professional article on two-wheeler sales
• RBI data on loan growth
• TransUnion CIBIL report on retail credit growth
• Business Standard article on EMI spending
• Naukri JobSpeak Index on white-collar hiring
• CMIE data on graduate unemployment
• Business Standard article on IT hiring trends
• The Hindu BusinessLine article on IT fresher salaries
• WTW survey on salary increases
• LinkedIn post on middle-class financial struggles
• CEPR article on 2008 recession impact
• New Indian Express article on manufacturing GDP
• McKinsey report on demographic dividend
• UNFPA India article on demographic dividend
• Budget 2025 documents
• Economic Survey 2023-24 on middle-class employability
• IBEF report on manufacturing sector
• ClearTax article on insurance planning
• Economic Times article on investment strategies
• Azim Premji University report on graduate unemployment
• The Deshbhakt YouTube Channel
• Nudge: Improving Decisions About Health, Wealth, and Happiness
• Middle class squeeze behind worrying economic growth numbers
• India’s Modi turns to middle class to revive growth
• India’s Economic Challenges in 2025
• India’s middle class tightens its belt
• Economic Survey 2024-25
• Decoded: What Budget 2024 means for the middle-class
• India’s middle class tightens its belt
• RBI Cuts Repo Rate to 6%
• Saurabh Mukherjea warns India’s middle class is losing financial ground
• Budget 2025: A Chance to Address India’s Growing Debt Burden
• India to Face Some Economic Challenges in 2025
• Stagnant consumer base, vanishing middle class: India’s middle-income trap
• Middle Income Trap: How India’s Middle Class Can Build Wealth
• India’s middle class caught in a vortex of economic woes
• Is India’s middle class under stress?
• Indian middle class & rising financial burden
• India’s economy is likely to stand firm
• Economic Survey 2024-25: India must address job creation to avoid middle-income trap
• @devinamehra on X: Household debt in India at 43% of GDP