Economic Slowdown and Shrinking Savings: The Middle-Class Crisis

India’s Middle Class Faces Mounting Challenges: Report Highlights 3 Key Threats

India’s middle class, once the engine of the country’s economic growth and consumption, is now struggling to sustain its financial stability amidst growing economic pressures. According to a report by Marcellus Investment Managers, this decline is primarily driven by three key factors: technological disruptions, a cyclical economic slowdown, and worsening household balance sheets.

The challenges faced by this demographic not only affect individual households but also have broader implications for India’s consumption-driven economy. Here’s a breakdown of the factors impacting middle-class survival:

1. Technological Disruptions

Technological advancements have radically altered the employment landscape, disproportionately affecting middle-class workers engaged in routine and repetitive jobs.

• Automation & AI: Roles that once provided stability, such as clerical, supervisory, and managerial positions, are increasingly being replaced by automation and artificial intelligence (AI).
• Job Displacement: Wipro Chairman Rishad Premji has highlighted the disruptive potential of AI, stating that “some jobs will disappear,” signaling a future where even white-collar roles face risk.
• Outsourcing Trends: Companies continue to cut costs by outsourcing roles or automating functions, eroding traditional employment opportunities that formed the backbone of the middle class.

2. Economic Slowdown

India’s post-COVID economic recovery has faltered, leading to a cyclical downturn that has deeply impacted middle-class consumption.

• Declining Corporate Earnings: Corporate earnings in Q2 FY25 saw their steepest decline in two decades, excluding global crises like the 2008 recession.
• Sluggish Consumption: Urban consumption, particularly in larger cities, has been hit hard. Hindustan Unilever and Nestlé India, two giants in the FMCG sector, have reported subdued sales growth due to reduced spending by middle-class consumers.
• Impact on FMCG Sector: Urban markets, which account for two-thirds of FMCG sales, have seen declining demand. Nestlé India’s MD, Suresh Narayanan, noted a “shrinking middle class” as a significant factor for the slowdown in food and beverage growth, now at just 1.5–2%, down from double digits.

3. Worsening Household Balance Sheets

Rising household debt and shrinking savings have further strained middle-class finances.

• Declining Savings: RBI data reveals that net household savings as a percentage of GDP are at their lowest in nearly 50 years. While gross savings have held steady, the burden of unsecured loans has eroded net savings.
• Reduced Disposable Income: High-interest rates, combined with elevated food inflation, have left families with limited discretionary income, making it harder to sustain their previous spending levels.
• Debt Burden: Mounting loans have created financial stress, leaving many middle-class families vulnerable to economic shocks.

Impact on Urban Middle Class Consumption

Urban households, which are central to India’s consumption-driven economy, have been disproportionately affected:

• Elevated food prices have eaten into budgets, forcing many to cut back on discretionary spending.
• High-interest rates have further reduced affordability, curbing purchases like real estate, automobiles, and other aspirational goods.

Outlook: Persistent Threats to the Middle Class

While economic cycles eventually stabilize, Marcellus Investment Managers warns that technological disruptions and declining household savings pose long-term challenges. These structural issues require targeted interventions to safeguard the financial health of India’s middle class.

Important Points to Address Middle-Class Challenges

1. Upskilling & Education:
   • Promote skill development programs to help workers transition into emerging sectors like AI, data analytics, and renewable energy.
   • Encourage lifelong learning initiatives to keep workers competitive in an evolving job market.
2. Policy Interventions:
   • Introduce tax benefits or subsidies aimed at reducing the financial burden on middle-class families, especially for education and housing.
   • Provide affordable credit options to curb dependency on high-interest unsecured loans.
3. Encourage Savings:
   • Create awareness about financial planning to promote disciplined savings habits.
   • Provide incentives for investing in government-backed schemes and mutual funds to boost household savings.
4. Support for SMEs:
   • Encourage the growth of small and medium enterprises (SMEs) to generate stable employment opportunities for the middle class.

India’s middle class is at a crossroads, facing challenges that demand both individual resilience and systemic reforms. Addressing these issues effectively will not only revive the fortunes of this critical demographic but also ensure the sustainable growth of the broader economy.