McKinsey has predicted that India's middle class would grow from 5 per cent of the population to around 40 per cent 20 years hence.
Three years ago when India's GDP growth was astonishing the world, a study by the McKinsey Global Institute predicted that in two decades its consumers would be a force to reckon with. This is how Eric Beinhocker, Diana Farrell and Adil S. Zainulbhai gushed in The McKinsey Quarterly of August 2007: “The same energy that has lifted hundreds of millions of Indians out of desperate poverty is creating a massive middle class centred in the cities.”
Really? The Mumbai Human Development Report 2009, prepared by the city's municipal corporation, the first ever by any city, finds more than half its citizens live in scabrous filth on just 6 per cent of the city's land; less than 3 per cent use cars or taxis to commute and 44 per cent walk to work — out of compulsion, not to make a statement or to lose weight.
As India's urban spaces start to burst at the seams, the story of deprivation is being repeated ad nauseam. Yet the McKinsey authors, carried away by their rhetoric, further predict that India's middle class, mostly “centred in the cities” would grow from 5 per cent of the population to around 40 per cent, 20 years hence.
That same year, Forbes magazine, in its issue dated November 7, carried a story on the Indian middle class, which cited a survey by the brokerage firm CLSA, that estimated the middle class at around 300 million, or 30 per cent of the population.
The story went on to define the markers of middle-class prosperity thus: “An estimated 100 per cent of households have televisions, 91 per cent have mobile phones and 19 per cent own four-wheel vehicles. Half the households experienced growing incomes in the past 12 months, of which one-third enjoyed a rise in excess of 20 per cent. The statistics are a reflection of India's strong growth…”
In February this year, a Deutsche Bank report on the subject took a more balanced view of the numbers: Cautiously, it suggested the middle class to be somewhere between 30 million and 300 million, a range that renders meaningless any conclusion about its relative size and place in the demographic spectrum.
CREATING A MYTH
A part of the reason for the wide divergence is the use of different criteria to quantify the middle class. But the possibility of such a wide range within which one can literally choose and pick the size of the Indian middle class has a hidden advantage; it generates public dreams that, in turn, create myths, as Joseph Campbell once suggested. The breathless conclusions of the McKinsey-type research — pole-vaulting the Indian consumer to the fifth largest market in two decades — only add to the fantasies of an emergent economic power.
But no data on the size of the middle class encourages the “public dream” as much as sleight-of-hand comparisons with developed country consumers. When analysts point to the possibility of the discretionary Indian consumer outnumbering those in Germany, they create a myth of a shining India. Persistent and expanding belief in that myth turns it into a truth.
That kind of myth-making would not ordinarily matter, except as a reality check for a shopper caught in a downturn. But it is particularly harmful for the policymaker because it can blind him to the hollowness of the country-comparison in the first instance. What does it matter if the Indian middle class is larger than Germany's if it remains just a fraction of the Indian population?
Look at the latest study on Asia's middle class in the Asian Development Bank's “Key Indicators for Asia and the Pacific 2010” and you realise how an imperfect ‘reading' of data can imprison India's policymakers in the tangled web of the myth-turned-truth process.
In a special chapter devoted to the “rising middle class” in Asia, the ADB pays the usual obeisance to its power to revive consumption and trade, drive innovation and inspire enterprise. That sounds sweet to the policymakers' ears and not surprisingly, the media also loves such sweeping compliments.
But the ADB cannot deny its own caveats. It identifies the middle class in terms of a daily per capita consumption of $2 to $20 (in purchasing power parity terms), based on survey data in 2005. Unlike other analysts, the ADB has three sub-sections: The lower middle class with per capita consumption of $2-4 per day; the middle segment up to $4 and the upper between $10-20.
ON THE CUSP OF POVERTY
India's ranks of the middle class grew by 205 million in the 17 years to 2008. But, and here is the danger signal, more than 70 per cent of the middle class is in the lowest segment. Thus, out of 206 million, more than 150 million eke out a vulnerable existence on the border of an international poverty line of $1.25 per day.
Why? The ADB tells us that global economic vicissitudes make the bottom segment very vulnerable. But that is an omnibus caveat it issues for all Asian countries under review and would apply most to commodity-exporting countries.
The fragility of the vast majority of Indians on the other hand, is largely domestic in origin emerging from the cumulative lack of entitlements such as stable incomes medical insurance (just 3 per cent of India's population enjoys it), recourse to education and everything else that eases upward mobility.
Measured against these indicators instead of per capita consumption alone, the proportion of the poor would not just include those Below the Poverty Line segment, now recalculated at around 40 per cent of the population, but those above it and without the above entitlements. Together, the numbers of the poor and vulnerable, as an official committee called them, would constitute nearly 80 per cent of the population.
Using 2005 data, the McKinsey authors counted 50 million among the middle classes; the number coincides neatly with the estimate of the ADB's upper two middle-class segments. That number is more than Canada's population, but it is just 5 per cent of India's.http://twitter.com/umeshshanmugam