The biggest driver of India's road to economic recovery after the first wave of coronavirus was consumption; consumption by the middle class. Revenge spending in purchasing for festivities and an unexpected rebound in consumers' appetite for fashion-related products, followed by discretionary spending, pulled the country out of recession.

With the onslaught of the second wave, the middle class has been hit the hardest and may fail to bail out the economy this time. Consumer confidence has plummeted owing to the anticipation of the third wave of covid. Also black fungus epidemic has further aggravated this dip in confidence.

The middle class has always been the country's go-to cohort and a savior in every crisis. Unfortunately, they have not got the policy's attention. For the policymakers, they are nothing more than a milch cow. 

The middle class is at the heart of India's consumption-led growth, and now it is time for policymakers to recognize that, without which the country's economic revival seems impossible.

Importance of middle class

The middle class was bolstered by the 1991 New Economic Policy and economic changes thereafter. The middle class then set the tone for the country's economic growth.

Today, the middle-class accounts for 28% of the entire population and 79% of the whole taxpayer base. It also accounts for 70% of overall consumer spending with a very high rate of Marginal Propensity to Consume(MPC). Because of the broad consumer base, it is the biggest and most profitable market for the producers.

Consumer durables like cars, bikes, televisions, air conditioners, cell phones, refrigerators see increased demand in India as the top market comes from the middle-class section. They are the ones who buy millions of cars every year, making India one of the world's largest car markets. They are the ones who are driving retail expansion in India.

The middle class is a significant contributor to savings and human resources, as middle-class households have higher savings and invest in human capital. Investment in human capital leads to an increase in productivity and technological advancement. Human capital is at the core of economic growth.

Also, the people of the middle class tend to invest in micro and small enterprises. A robust middle class encourages innovation and encourages entrepreneurs to start their businesses, creating good jobs that support the economy's growth. As a result, the middle class is critical to India's economic growth.

According to a report by Bain & Company, by 2030, consumer spending will see itself quadruple. The new Indian consumer will spend more than his predecessors.

By 2030, India will move from being an economy led by the bottom of the pyramid to one led by the middle class. The middle class will comprise around 80% of households in 2030 compared to about 50% today. 75% of consumer spending will come from the middle class.

It can be said that future growth will rely on the growing middle class.

So is it justifiable, at least for the sake of the economy, to ignore the middle class?

Impact 

It is the middle class that bore the brunt of the second covid wave. According to a report by Pew Research Centre, thirty-two million people have swept into poverty, the highest in any large economy. People earning less than 2 dollars a day rose by 75 million people in India. Before the pandemic, the world's middle class in 2020 was predicted to include 99 million people in India. This number is projected to be 66 million a year after the pandemic, reduced by a third. The poor population in India is forecast to be 134 million, more than twice what was expected in the run-up to the recession. India's poverty rate probably increased to 9.7 percent by 2020, a sharp rise from 4.3 percent in January 2020.

India's second wave of virus cases will hit the economy by prompting consumers to save for precautionary purposes rather than spend, unlike last year's contraction driven mainly by supply disruptions. Due to a fall in income level and rise in unemployment, even the savings have reduced. Therefore, the second wave effects are a double whammy affecting both the demand and supply side.

How vital is consumption?

The consumption demand is the most crucial component of Aggregate Demand. According to economist Adam Smith, "Consumption is the sole purpose of all production." It means that the level of consumption determines the production of goods and services. It is the incentive for a producer to produce. According to the income and employment theory by Keynes, consumption is the center point of all economic activities. Consumption plays an essential role in the determination of income, output, and employment in a country. In India, a significant proportion of consumption demand comes from the middle class. A solid middle class provides a stable consumer base that encourages productive investment.

Private consumption accounts for 60% of the Indian economy. Consumerism is self-reinforcing as it creates a virtuous backward linkage with other sectors of the economy such as metals, fibers, and chemicals. Besides services like transport, trade, and finance, it keeps the economy running continuously. The Investment Multiplier effect will take place, leading to economic growth. Beyond that, a robust middle class is a crucial factor in encouraging other national and societal conditions that lead to growth. 

Let us not forget Ayn Rand's words, who said: 'Upper classes are a nation's past, the middle class is its future.'

(Dr Anuradha Jain, Professor of Economics, VIPS, GGSIPU & Dhruv Jain, Student of Business Management, University of Delhi)