Even as innovative and cheaply priced products targeted at India's booming middle class are helping to spur domestic consumption and growth, this segment of the population remains vulnerable to economic shocks and carefully calibrated policy measures will be needed to sustain income gains in the longer-term, the Asian Development Bank (ADB) has said.
In a special chapter of ‘Key indicators for Asia and the Pacific 2010' report — ADB's flagship annual statistical publication — the multilateral lending agency has said that the ranks of India's middle class, defined as those consuming between $2 and $20 a day (based on survey data in 2005 purchasing power parity), grew by around 205 million between 1990 and 2008, second only to China.
The surge in numbers, it argued, has seen additional annual spending of $256 million and spawned low-cost, locally produced products and services such as Tata Motor's $2,200 Nano car, the Godrej Group's $70 battery-operated refrigerator and cheap mobile phone rates.
Titled ‘The rise of Asia's middle class', the chapter also notes that the emergence of a substantial middle class in India has created new avenues for employment and entrepreneurship, and a louder voice for improved public infrastructure and services.
Alongside, however, over 75 per cent of the country's middle class remains in the $2-4 daily consumption bracket — the lower end of a range of $2 to $20 — leaving this segment at risk of falling back into poverty in the event of a major economic shock like the global financial crisis. Infrastructure constraints, like unreliable power supplies, may also hamper consumption of durable goods.
To help unlock the full potential of the Indian middle class as consumers and drivers of growth, the report says the government must continue to remove structural and policy impediments to development and improve income distribution across the population.
Actions should include infrastructure improvements and social safety nets that encourage spending, while providing a buffer during hard times. The government should also put in place policies that stimulate the creation of stable, well-paid jobs, and encourage entrepreneurship and education, the report says.
“Policies that bolster the middle class may have benefits not only for economic growth, but may be more cost-effective at long-term poverty reduction than policies that focus solely on the poor,” said ADB's Chief Economist Jong-Wha Lee.
The report notes that while a strong middle class is necessary for sustainable economic growth, higher incomes are resulting in environmental pressures and a rise in ‘diseases of affluence' such as obesity, which policy makers will increasingly need to address.
As for the whole of Asia, the report said that the region's rapidly expanding middle class is likely to assume the traditional role of the U.S. and Europe as primary global consumers and help rebalance the global economy. Asia's consumers, it notes, spent an estimated $4.3 trillion, or about one-third of OECD consumption expenditure, in 2008. By 2030, the region is likely to spend $32 trillion, comprising about 43 per cent of worldwide consumption.
According to Jong-Wha Lee, developing Asia's middle class is rapidly increasing its size and purchasing power, and will be an increasingly important force in global economic rebalancing. “Even though the Asian middle class has significantly lower income and spending relative to the Western middle class, its growth in expenditures has been remarkable and its absolute levels are commanding,” he said.
