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India’s middle class is expanding, thanks to rapid urbanisation. This will reshape the economy

Nearly 30 years after India’s middle class rose to a considerable size, the decade of the 2020s is witnessing an exciting new trend. The middle class is the fastest-growing segment of India’s income-earning population. In 2021, this segment, classified as households with family incomes of between ₹5 lakh and ₹30 lakh, numbered 91 million households, representing 30% of all households. Growing at an annual rate of 6.3% a year by 2031, this figure is set to rise to 165 million households by 2031 or approximately 46% of all households.

Apart from the size, the growth of the middle class is ushering in changes at multiple levels which will significantly impact the socioeconomic profiles of cities, states and, ultimately, the collective economic prowess of the nation.

In the early 1990s, up until the first decade of 2000s, the increase in middle-class households happened largely in metros and tier-1 cities of India. But since then, the trend towards urbanization has been picking up pace, and as a result, we are beginning to see an uptick in prosperity levels. During the five years (2016-2021), the segment has grown significantly in cities with populations of 1-4 million.

In the South, boom towns such as Malappuram, Kozhikode and Kochi have recorded a much higher-than-average growth rate for middle-class households. Raipur, Tiruppur, Indore, Bhubaneswar and Ranchi are among the dark horses that have raced past others to grow their middle-class households. Also included in this club are historic centers entering a new phase of growth and revival: Patna, Agra, Bhopal, Gwalior and Rajkot. Significantly among the top 10 fastest-growing middle-class cities, only two belong to tier 1/metro cities: Surat and Bangalore.

This rise in prosperity is expected to get a further boost as nearly 41% of people will become residents of urban India by 2031. The top nine metros and 54 boom towns will be significantly more prosperous than other urban centres.

Traditionally, the concentration of high-income households has been in Maharashtra, Delhi, Tamil Nadu, Punjab and Gujarat. These states have a higher rate of urbanisation, which is growing at about 43% compared to the national average of 35%. For some, like Delhi, it is even higher at 98%. Although these states have a large concentration of middle-class and rich households, the growth rate is slow. On the other side, Uttar Pradesh, Telangana and West Bengal are witnessing a much faster growth rate of middle-class households. There is a key difference, though. While the growth of Telangana and West Bengal is largely fueled by one urban center – Hyderabad and Kolkata – in Uttar Pradesh, several towns are contributing to this growth. Among them are Kanpur, Saharanpur, Aligarh, Agra and Lucknow. Another significant factor that has contributed to the growth of the middle class is the emergence of developed rural clusters. About 150 developed rural clusters are to be found across India, of which nearly 41% are near metro cities. Located on the peripheries of larger cities, these are not just extensions of the cities they are attached to. But, in terms of socioeconomic profile and consumption patterns, too, they mimic urban trends. Developed rural households are earning and spending significantly more than boom town households. These households are engaged in non-agricultural work and are mostly employed in the services and retail sectors.

The expansion of middle-class and high-income segments is reshaping consumption. It is helping India evolve into one of the world’s most dynamic consumption environments, providing the basis for sustained economic growth. These two segments are expected to drive nearly $2.7 trillion of incremental consumption spend by 2030. As middle-class households move up the income ladder, they will spend more on apparel, communication, transport, personal care and entertainment.

Consider the case of the newly minted middle class in the developed rural clusters. The penetration for categories such as two-wheelers, mobile phones and internet connections is higher in the developed rural cluster. This is not surprising as last-mile connectivity is a critical factor, which is fueling the purchase of two-wheelers. With the service sector and digital economy on the rise, usage of mobiles and internet connections become critical for these households.

Saving patterns, too, are expected to change dramatically. Middle-class households spend four times more than lower-income households on insurance products while rich households spend three times more than middle-class households.

India is on the cusp of a tremendous opportunity for both economic progress and improvement in the well-being of its citizens. A faster pace of urbanization creates new pockets of prosperity in urban and rural areas. The changing economic geography of India is bound to reveal exciting opportunities and challenges for marketers in the coming decades.

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