Sunday, November 24, 2013

How large is the middle class in India?

Today's issue of the Times of India features an interesting op-ed piece India's middle class awakes by Pavan K. Varma. He states
If we take a strictly economic criterion of defining a middle class person as anybody who belongs to a household which has a monthly income of between Rs 20,000 and Rs 100,000 a month, the middle class starts to look very substantial. Estimates reveal that as per this criterion the size of the middle class in 1996 was a paltry 25 million. Today, it is in excess of 160 million. And, by 2015, its numbers are expected to go up to 267 million.
A few comments.
First, this means that in 2 years the Indian middle class will be comparable to that of the USA!
and 13 times the whole population of Australia!

Second, the income amounts [20 to 100 thousand Rupees per month] convert to US$4,000 to $20,000 per year. This may seem strange. [It took me a couple of trips to India to understand this.] In the USA such a household income would define poverty. However, this illustrates how economics works. Broadly speaking, living costs scale with salaries. Salaries are roughly ten times lower than the USA, but so is food, housing, education, health care, and transportation. On the other hand some things don't scale. An iPhone costs as much in India as in the USA. Thus, the insatiable demand for them is puzzling!

Third, it should be obvious why Western companies find out-sourcing to India so attractive. IBM now has more employees in India than in the USA. Unless, Western workers lower their upper middle class expectations and associated wage demands it is hard for me to see how they are going to remain competitive.

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