- The size of the middle class is substantially lower
- The yearly earnings of the middle class are substantially lower
- Combination of both
- The GNI per capita is substantially higher
- Since black money is supposed to be 50% of the Indian economy, double the figures for GNI (which GNI?) per capita. The point being that black money is usually not invisible to GDP calculations which are based on turn-overs but black-money is often hidden from GNI which is usually based on IT revenue calculations. (this idea is due to Kapil).
Wednesday, June 25, 2008
The Size of the Indian Middle Class
(Everybody seems obsessed with size these days, including 90% of your SPAM folder) In a recent PBS documentary on the rise of the Indian middle class (brought to my attention by my friend Omar "He who is not AMOK" Karim), one of the numbers bandied about was that the middle class in India was 30% and defined as those earning between $5000 and $25000 per year. (The documentary is worth watching, if not for anything else, for observing the paranoia that seems to be afflicting Americans about how the rise of consumerism in India and China will impact the American way of life). In a subsequent discussion with my colleague Kapil Paranjape here, we tried to figure out how such a number was at all possible. Let me start with a very simple analysis. According to Nationmaster the Gross National Income (GNI) per capita in India is $128 (all numbers are for yearly incomes). Let us assume for extreme simplicity that the middle class is 30% and there is only one more class whose income is x. We will ignore for now say, the super rich and the super poor. Then it is clear that if N is the population of India .3 * 5000 * N + .7 *x * N = 128 * N (The N is fake anyway and can be factored out and we can work with GNI per capita but I am keeping it just for the sake of clarity). Notice that the above equation cannot be satisfied for any positive x. Even if we assume that there are many other classes earning y, z, etc. with suitable fractions, these will be added contributions to the left hand side (LHS) of the equation, and while we would not be able to solve the equation since there are multiple unknowns now and one equation, we could still conclude that positive solutions of x, y, z ... are not possible since the first term on the LHS is already substantially bigger than the RHS. One of the reports that Kapil dredged out from the Economic Times claims the GNI per capita to be $750. Note that this number on the RHS of the above equation still does not allow positive solutions for x etc. Now that its a free for all, since nobody seems to have any reliable numbers, let us keep $750 on the RHS, and 30% as a size of the middle class. Then the maximum earning (i.e the upper threshold) that the middle class can have is $2500 obtained by putting x=0 i.e. assuming no other strata of society (which, I think, is also the middle class dream!). Clearly for any positive x and keeping the fraction as 30%, the yearly average earnings of the middle class would be quite a bit below $2500. While this analysis has been fairly simplistic, it exposes some gross features of this problem which clearly need correcting. How do we correct this?