Indian middle class & rising financial burden: What’s the way out? | LME 58
India's middle class has long been celebrated
Some call it the backbone of the economy
But that backbone seems to be under a lot of strain.
Inflation, stagnant wages and double taxation are taking a heavy toll.
And add to that, the current structure of GST–a middle class person’s backbone is stressed more than ever.
Think about it: the middle class is estimated to make up nearly 30-40% of India’s population.
They drive consumption, fuel government revenue, and support growth and yet are burdened disproportionately.
This has led to the rise of the Middle-Class Tax Movement—a growing call for tax relief and systemic change. Just when Finance Minister Nirmala Sitharaman prepares to present the first full budget of this term.
Let’s take a closer look at the mounting pressures on the middle class, how this is contributing to the slowing GDP, and explore ways India can create a tax system that works for everyone.
Who is India’s middle class? There is no- one definition
It’s normally considered to be those with an annual income between 4-5 lakhs and 30 lakh rupees. There are lower and upper middle class income families in this.
In March 2021, global think-tank Pew Research Centre estimated India’s middle-class had 66 million people down from 99 million before the COVID-19 pandemic.
Indian think tank People Research on India's Consumer Economy (PRICE), says that the middle class increased to 31 percent of the population in 2020-21 from 14 percent in 2004-05.
So what is ailing India’s middle class?
Before I go into that,
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Why is the Indian middle class’s burden increasing? Let’s start with the most glaring issues—stagnant wages and skyrocketing expenses.
Over the past five years, real wages in India have barely budged. In fact, according to data from the Centre for Monitoring Indian Economy (CMIE), wage growth has been a tiny 0.01%. This has hit sectors like manufacturing and retail the hardest, where much of the middle class is employed.
And the double whammy is that wage inequality has been widening.
Data from the International Labour Organization (ILO) shows that the rich are becoming richer. But the middle and lower-income groups haven’t seen the same benefits. In fact, while the top 10% of earners have enjoyed substantial pay increases over the past decade, the bottom 50% have barely seen their wages grow at all.
And unemployment is presently at 8 percent.
Many workers are seeing little to no increase in their paychecks, even as the cost of living keeps climbing.
Food inflation hit 10.9%, and overall inflation stands at 6.2%.
Add to that rising household debt.
Many families are forced to take on loans just to maintain their current standard of living. In 2024, India's household debt-to-GDP ratio went up to 35%, showing that more people are under financial pressure. The middle class, with not much savings or job security, is increasingly depending on credit to make ends meet.
So with less and less disposable income, private consumption by the middle class, which drives 60% of India’s GDP, is slowing down.
Even major companies like Nestlé India and Hindustan Unilever are feeling the pinch, reporting drops in demand. Nestlé’s managing director went as far as to warn of a “shrinking middle class”—a sign of how deep the problem runs.
If the middle class is struggling to maintain its purchasing power, that means the consumer-driven economy is in serious jeopardy. And all sectors are feeling the squeeze.
It's no wonder the December Purchasing Managers’ Index (PMI) fell to a 12-month low at 56.4. The Purchasing Managers' Index (PMI) is a key indicator of economic health, measuring activity in the manufacturing and services sectors.
And then there’s GST—the tax system that was supposed to simplify our lives. Instead, it has added to our woes.
I did an entire episode on this and you can watch how bizarre some of the GST slabs are here.
But the thing is, the middle class is feeling the pinch of GST, even on essentials. Take healthcare, for example. Health insurance premiums are taxed at 18%. This means recovering from an illness comes with a hefty price tag.
Education is another area where families are hit hard. Parents prioritizing their kids’ future end up paying 18% GST on private schools, coaching classes, and even study materials.
If that wasn’t enough, the tax on two-wheelers adds insult to injury. A two-wheeler isn’t a luxury for most middle class families—it’s a necessity for getting to work, school, or the market. But they’re taxed at 28%, the same rate as luxury cars.
The middle class also faces double taxation. Salaried middle-class individuals are among the largest contributors to income tax, with rates as high as 20–30% for higher income brackets.
In between all this if you manage to save, then your savings are taxed too.
Interest earned from fixed deposits (FDs), recurring deposits (RDs), and even basic savings accounts doesn’t come tax-free.
Owning property and commuting come with steep taxes for the middle class. Homeowners pay upfront costs like stamp duty, registration fees, and annual property taxes, while two-wheelers and cars are taxed multiple times through GST and road tax
So the Gross domestic product (GDP) has nosedived to 5.4 percent in the second quarter 2 (July-September 2024), which is the lowest in two years.
To make matters worse, government spending on infrastructure, schools, and hospitals has been on the decline.
So, what can be done to give some relief? Let’s talk solutions:
First off, the tax-free limit of income could be increased to ₹5 lakh. This means anyone earning up to ₹5 lakh would pay no tax at all. Also, for those earning above ₹20 lakh, the 30% tax should only kick in for incomes above that threshold, not everything.
Then essentials like healthcare, education, and housing shouldn’t be taxed at high rates. These aren’t luxuries; they’re basic needs. Lowering GST on these would bring much-needed relief to families already struggling with their budgets.
For people buying homes, right now they can only reduce their taxable income by ₹1.5 lakh for their home loan repayments. If this limit is increased to ₹3 lakh, they would save more money on their taxes.
Healthcare is essential, and families shouldn’t have to drain their savings to afford insurance or medical treatments. Increasing health insurance premium deductions to ₹40,000—₹70,000 for senior citizens—would help make healthcare more affordable for everyone. And of course, make sure there is no GST on healthcare.
Next, we need better roads, schools, and hospitals. More government spending in these areas would directly benefit the middle class, giving them access to better infrastructure and services.
And where will money for all this come from?
Well, tax the ultra-richTNM Pongal Sankranti Subscription Offer
It’s time for the wealthiest to contribute more. Introducing a wealth tax of 2% on assets over ₹100 crore, and considering an inheritance tax for large estates, would help address the growing wealth inequality.
The top 1% of the population controls more than 40% of the nation’s wealth, while the bottom 50% owns just 3%.
And loans given to those big corporations that turn into NPAs? The government should more proactively ensure recovery.
Of the ₹10.57 lakh crore written off in the last five years, ₹5.52 lakh crore pertained to loans from large industries.
It’s time for policymakers to prioritize the middle class—to recognize that our struggles aren’t just personal, but national. Because a thriving middle class isn’t just good for us—it’s essential for India’s future.
Without these measures, India’s consumption-driven economy will keep weakening, and everyone will feel the consequences. The decline of the middle class is a deeper issue that could destabilize the entire economy.
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Produced by Megha Mukundan, edited by Nikhil Sekhar