The mystery of India’s missing middle class: Is it really part of our growth story?

Against this backdrop, can one pin hopes on the country’s burgeoning middle class to drive a consumption-led growth cycle—one reminiscent of China’s transformative economic surge between 2000 and 2010?

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The research centre PRICE defines a ‘middle-class’ Indian as someone earning between ₹1.09 lakh and ₹6.46 lakh per year based on 2020-21 prices, or belonging to a household earning ₹5 lakh to ₹30 lakh annually. It anticipates this segment expanding from 432 million people in 2020-21 to 715 million by 2030-31 and further to over 1 billion by 2047, forming 61% of India’s projected population of 1.66 billion. 

Yet, beneath the headline numbers, a troubling pattern has emerged: urban discretionary spending remains subdued. The Reserve Bank of India’s (RBI) latest Urban Consumer Confidence Survey for May 2025 underscores this caution. The Current Confidence Index, which measures consumer sentiment, stays below the neutral mark at 95.4, having dipped marginally from March. While the Future Expectations Index rose to 123.4, signalling optimism, weak present sentiment continues to weigh on spending. People expect things to improve but hesitate to spend now.

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Inflation expectations also weigh on consumption. Retail inflation eased to 2.82% in May, prompting a 50-basis-point rate cut by RBI. Yet, price pressures remain intense in essentials such as rent, education, healthcare and personal care. Softening food prices and improved real incomes brought some respite, but high urban living costs constrain discretionary expenditure.

A deeper worry lies in the labour market. In May, India’s unemployment rate, according to the official Periodic Labour Force Survey (PLFS), rose to 5.6% from 5.1% in April, with joblessness among urban youth aged 15-29 surging to 17.9%. Even amid high growth, job creation has not kept pace. Many new jobs remain informal or gig-based, offering little security or upward mobility.

This employment shortfall undermines income security and confidence within the middle class. Private estimates from the Centre for Monitoring Indian Economy (CMIE) paint a stark picture, showing a shrinking labour force and involuntary exits from employment. CMIE places India’s labour force participation rate at 40-45%, against the PLFS’s 50-55%, a discrepancy explained by differing definitions: CMIE follows the International Labour Organization’s income-based criteria, while PLFS includes unpaid or nominally productive work. 

Either way, a large proportion of people without stable jobs means households are understandably cautious about big-ticket discretionary spending.

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India’s middle-class dilemma becomes sharper when compared with China’s experience. Between 2000 and 2010, China’s middle class expanded rapidly, fuelled by mass job creation in export manufacturing and sustained wage growth. By 2010, around 40% of its population was middle class. This powered booms in its markets for housing, automobiles, travel and durables. It was backed by policy interventions aimed at affordable housing, employment generation and broad access to credit for asset creation. India, despite rapid urbanization, has not matched this with comparable factory employment or city housing initiatives.

Credit, a crucial enabler of middle-class consumption, has expanded but unevenly. Digital lending has surged but remains concentrated in small-ticket but high-cost personal loans for immediate consumption. As flagged by a Fitch Ratings report in January 2025, this rise in unsecured retail lending poses asset quality risks for banks. For middle-class households, a lack of formal job contracts and reliable income documentation limits access to affordable credit for high-expense purchases.

If India’s middle class stays on the margins of its growth story, the economic consequences could be significant. Domestic demand may stay fragile, increasing reliance on public investment and exports. Inequality risks would deepen if growth benefits just the wealthy, while consumer-facing sectors would grapple with weak demand and stunted expansion potential.

A persistently cautious middle class may have social and political ramifications. Rising aspirations without economic security often leads to public frustration and mistrust in institutions. This could make it harder to turn growth into broad-based prosperity.

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India could take a leaf out of China’s story, which recognized early the crucial role of a thriving middle class in sustaining economic development and social stability. Its 14th Five-Year Plan (2021–2025) aims to expand the middle-income group, a goal reinforced by President Xi Jinping at the 2022 Communist Party Congress, where he committed to “substantially grow" this group.

India has all the required building blocks for a consumption-led recovery—but the blueprint is incomplete. Unless we create good jobs, raise real incomes and improve access to housing and affordable credit, the middle class may remain left out of the story. That, in the end, is a problem both for the economy and our social fabric.

These are the author’s personal views.

The author is professor, economics and policy, and executive director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR, Mumbai.