Why is India beset by sluggish middle-class income growth and stubborn inequality?

Hyderabad: India’s economic trajectory has been a tale of three broad chapters: the early phase of planned socialism with its state-controlled model; the 1991 liberalisation that unleashed capitalism and market forces; and the recent tilt towards trickle-down economics, emphasising growth at the top in the(misplaced) hope that it will benefit all.

Yet, today, India is beset by sluggish middle-class income growth and stubborn inequality that is estimated to be worse than during the British Raj. It is now clear that another model must emerge – ‘middle-out economics’, with its sharp focus on empowering the middle-class as the real driver of prosperity.

Why do we need it

The narrative, especially over the last decade, has been that helping the wealthiest through deregulation, corporate tax cuts, and business incentives will eventually lift everyone. But trickle-down philosophy is severely limited. The bottom 50% of the population still earns a fraction of what the top does. According to the World Inequality Lab (2022–23), the richest 1% in India command 22.6% of total income – a staggering imbalance that undermines social cohesion and economic potential. This lopsided growth risks the rise of a dual economy, where the wealthy elite enjoy the fruits of growth while the large masses of middle- and lower-income earners remain vulnerable.

Middle-out economics offers a fundamentally different lens. At its core, it argues that broad-based growth driven by a thriving middle-class – rather than the super-rich – is the most effective engine for sustained development, job creation, and social stability. The middle class is not just a consumer base; it is a critical source of demand.

In a country of 1.4 billion, the middle class is expanding rapidly. Estimates show that by 2047, nearly 63% of India’s population could fall within the middle-class income bracket (defined by the National Council of Applied Economic Research as Rs 5 to Rs 30 lakh per annum), making it the largest driver of income, consumption, and savings.

Why it matters

A robust middle-class means a diversified economic base, not overly reliant on top-heavy capital accumulation or limited export sectors. It means increased domestic consumption, which currently accounts for a significant portion of India’s GDP but can grow even more. By 2030, the country is expected to add 75 million middle-income households, which, alongside 25 million affluent ones, will form 56% of all households. This dynamic segment will drive 55% of incremental consumption, pushing India’s consumer spending from $1.9 trillion in 2021 to an estimated $5.2 trillion by 2031. This multiplier effect can power sustainable economic growth through local business scaling, increased tax revenues, and investment in public services – critical for inclusive progress.

Yet, the middle class today faces significant challenges. Income growth is uneven, and many households wrestle with rising debt. Reserve Bank of India data flagged household debt rising to 43.5% of GDP by mid-2025, with non-housing liabilities growing sharply. This reliance on debt obscures underlying fragilities that could hamper consumption if not managed carefully. Moreover, India’s middle-income earning levels, ranging between $2 to $10 per capita a day (roughly Rs 4,000 to Rs 20,000 monthly), reveal a diverse group, from salaried professionals to small business owners who remain vulnerable to financial shocks.

Why it works

The premise of middle-out economics is deceptively simple: strengthen the middle class, and you strengthen the entire economy. Unlike trickle-down theory, which assumes wealth will eventually filter down from the top, middle-out economics recognises that the middle class is the true engine of economic growth.

When middle-class families have higher incomes and greater purchasing power, they spend on goods and services, creating demand that fuels businesses and job creation. A shopkeeper in Pune buys more inventory, a manufacturer in Coimbatore hires additional workers, and a startup in Bengaluru finds customers for its products. This consumption-driven growth creates a virtuous cycle that benefits everyone, including the wealthy.

The middle class also drives innovation and entrepreneurship. Small business owners, professionals, and skilled workers are the backbone of economic dynamism. When they have access to capital, quality education, and healthcare, they can take calculated risks, start ventures, and contribute to productivity growth. India’s tech success story wasn’t built by billionaires alone; it was built by lakhs of middle-class engineers, entrepreneurs, and professionals who had the education and opportunity to innovate.

Moreover, middle-out economics creates social stability. A thriving middle class reduces inequality, strengthens democratic institutions, and creates social mobility. When people see a clear path to improving their circumstances, they invest in their futures and their communities.

The evidence supports this approach. Countries with strong middle classes consistently show higher GDP growth, lower poverty rates, and more resilient economies. For example, South Korea’s economic miracle was built on deliberate policies that expanded the middle class.

What it needs

The policy implications for embracing middle-out economics in India are profound. Governments must focus on skill development, affordable quality education, healthcare access, and infrastructure that directly benefits middle-class households. There needs to be a shift away from just corporate tax incentives toward comprehensive support for MSMEs, startups, and gig workers who form the backbone of middle-class economic activity. Addressing the skill gap is paramount when only around 51% of graduates are employable, and formal skill training covers a mere 2.3% of the workforce.

Furthermore, middle-out economics demands tackling India’s ‘middle-income trap’, where the economy risks stagnating without transitioning to higher levels of per capita income. India’s manufacturing sector, crucial for providing scalable jobs, has stagnated between 15% and 17% of GDP – well short of the 25% target. Meanwhile, services dominate the GDP at over 50% and yet fail to generate enough employment for the millions entering the workforce every year. Revitalising manufacturing with technology infusions, innovation, and export expansion can create quality jobs and lift many into stable middle-income brackets.

This is not just theory. The middle class has historically been a transformative force globally –whether in post-war America’s consumer boom or East Asia’s rapid industrialisation. The ‘middle-out’ approach has yielded more equitable growth and stronger social contracts. India, with its young demography and entrepreneurial spirit, stands to benefit immensely if it nurtures this segment with targeted policy and inclusive growth.

Critics may argue that boosting the middle class risks inflationary pressures or fiscal deficits. But the alternative, continuing a narrow trickle-down focus, risks entrenching inequality and social unrest while squandering India’s demographic potential. Public investment in infrastructure, education, and healthcare for the middle class will yield long-term fiscal benefits through higher productivity and tax collections.

The government must listen to the chorus of voices – economists, policymakers, civil society –that calls for a fundamental reorientation of growth strategy. Middle-out economics offers a clear, data-backed, and socially cohesive path forward. It is not merely a catchphrase but a requisite paradigm shift to break the middle-income trap and create an economy that works for millions, not just millionaires.

The choice is clear: we can continue with an economic model that concentrates wealth at the top and hope for spillover, or we can build an economy from the middle out, where growth is faster and more equitably shared. The middle class doesn’t need charity; it needs opportunity. And when the middle class succeeds, India succeeds.

Ashraf Engineer has been a journalist for more than three decades, leading newsrooms and initiatives across print, digital, and audio. He is the founder of the All Indians Matter platform, a home for conversations with and about India on issues that matter, and the host of the podcast by the same name.

Disclaimer: The views and opinions expressed in the article are those of the author and do not reflect the official policy or position of NewsMeter.