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Who Is ‘Middle Class’ In India, Today?

BloombergQuintOpinion

Whether it is the union budget or electoral forecasting, it is common for analysts and political commentators to invoke the “great Indian middle class”. However, one piece of analysis that is entirely missing in the popular discourse is the precise definition and characterisation of ‘middle class’, and the number of people who belong to it. This is because the manner in which incomes are distributed doesn’t allow for such easy answers.

The Income Tax department puts out data every year on the distribution of incomes of income tax filers, along with the taxes paid by people in each income bucket. The latest data we have is for the 2016-17 financial year (2017-18 tax assessment year), which shows that 4.7 crore individuals together paid a total of Rs. 2.73 lakh crore in income taxes.

The first thing to notice is that this number of 4.7 crore taxpayers—which includes people with zero taxable income—is far less than the total number of workers in India, which was estimated by the 2011 Census at around 48 crore. In other words, less than a tenth of our total workforce pays income taxes, indicating that the rest of the workers either work in the so-called ‘informal economy’ or in sectors such as agriculture where income is not taxed. This analysis ignores any unaccounted income.

That is the first challenge with precisely characterising the middle class – we simply don’t have data on the income of over 90 percent of our workforce. One way to treat it is to assume that people belong to this ‘unaccounted 90 percent’ all have incomes lower than the taxable limit of Rs. 1.5 lakh, in which case the middle class would have to be defined to lie entirely within this ‘unaccounted 90 percent’.

By this definition, anybody who files income tax returns is ‘above middle class’.

Another approach is to assume that the middle class lies within the set of people whose income is known, i.e. those who file taxes. Here the assumption is that we don’t know anything about the incomes of the 90 percent of the workers who don’t file income tax returns. Here again, the analysis is not so straightforward.

The conventional view is that income follows something like a ‘normal distribution’ or a bell curve, with a thick middle class where most of the people are located with a few people who make less (the poor) and a few who make more (the rich). As it happens with quantities that display network effects, income follows a ‘power law distribution’.

The basic feature of a power law distribution is that it is self-similar – where a part of the distribution looks like the entire distribution.

  • Based on the income tax returns data, the number of taxpayers earning more than Rs 50 lakh is 40 times the number of taxpayers earning over Rs 5 crore.
  • The ratio of the number of people earning more than Rs 1 crore to the number of people earning over Rs 10 crore is 38.
  • About 36 times as many people earn more than Rs 5 crore as do people earning more than Rs 50 crore.

This ratio is in a remarkably narrow range – thus confirming that the distribution of incomes in India follows a power law.

And the quirk of the power law is that even though there is a peak in the distribution, there is a rather long right tail. The chart below shows the distribution of individual incomes in India, but it had to be drawn with a logarithmic X axis so that the entire distribution is visible.

Who Is ‘Middle Class’ In India, Today?

The first impression upon seeing this distribution is that there is a ‘thick middle’ (notwithstanding the logarithmic scale), which suggests that anybody who files taxes but makes less than Rs 10 lakh per annum is middle class. In fact, this is precisely the class targeted by the tax cuts of the recent interim budget, where a tax rebate meant that people who make less than Rs 5 lakh per annum no longer need to pay income tax.

However, a strict definition of the middle class based on this distribution can be problematic.

It is highly unlikely that anybody who earns just over Rs 10 lakh per annum would describe herself as ‘rich’.

In fact, the shape of the distribution including the long right tail implies that it would be problematic to describe a precise point beyond which we can call someone ‘rich’.

It is reasonable to assume that most people have some friends who make less money than them and some friends who make more. Even if people hang out with others similar to themselves—and who lie not far from them on the income distribution—there is an important distinction between friends who make less and friends who make more.

The shape of the income distribution means that people who make less than you make only a little less than you, but people who make more than you make far more.  

Unless you are at the far right tail of the distribution (among the richest people in India), it is likely that you have friends whose incomes are an order of magnitude (or two) more than yours.

When you know people who make ten or a hundred times as much as you, it is virtually impossible to describe yourself as ‘rich’. So most people in India, whether they barely pay taxes, or they make over a crore a year, describe themselves as ‘middle class’. Some take a middle ground and call themselves ‘upper-middle class’.

Back in 2011, a movement called Occupy Wall Street began in New York, targeting the rich and aiming to highlight the problems of economic inequality. These protests were against the so-called “1 percent”, who made a disproportionate share of income and owned a disproportionate share of America’s wealth.

Based on income tax data, the income required to be a “one percenter” in India is about Rs 35 lakh per annum. It would be an interesting exercise to do a survey of people earning about that much asking where in the income distribution they fall.

My money, based on the power law distribution of income in India, is on most of them describing themselves as ‘middle class’.

Karthik Shashidhar is the founder of Bespoke Data Insights, and the author of ‘Between the Buyer and the Seller’.

The views expressed here are those of the author and do not necessarily represent the views of Bloomberg Quint or its editorial team.