The missing middle in India’s growth story

Why in the News

Five countries, including Vietnam, moved up to the World Bank’s upper-middle income category this year, but India, lower-middle income since 2007, did not. India’s growth is adding workers and millionaires faster than high-productivity jobs and a broad middle class, and that gap is the “missing middle”.

Why has India not moved up when its peers have?

1. World Bank income groups: The World Bank sorts countries into income groups by average income per person. Moving up works like a promotion: incomes must keep rising for years to cross the next bar.
2. New upper-middle income members: Jordan, Micronesia, the Philippines, Sri Lanka and Vietnam moved up to upper-middle income this year.
3. Faster climbers: Vietnam took 16 years and China 13 years to move from lower-middle to upper-middle income.
4. India’s long wait: India has stayed in the lower-middle income group for 19 years.
5. The takeaway: If dollar incomes grow 8.5% a year, India could cross today’s threshold in about six years, so the climb is possible but needs more productive growth.

Why are new jobs not making Indians richer?

1. Labour force growth: India’s labour force grew by over 100 million in under a decade, and the unemployment rate trended lower.
2. Work without productivity: The poor cannot afford to stay unemployed, so they take whatever work they find. Being employed is not the same as being productively employed.
3. Women’s self-employment: About two-thirds of the new workers are women, most of them self-employed in agriculture.
4. Low-value sectors: Agriculture still holds 43% of workers, and 79% of non-farm workers are in informal enterprises, unregistered small units that add very little value to what they produce.

Why have factories and public investment not built the middle?

1. Factories without jobs: Registered factories doubled in two decades to 2.6 lakh, but manufacturing’s share of the economy and of employment has not risen.
2. Gig work over factory work: Over the last four years, fewer workers found formal manufacturing jobs than gig economy jobs, short-term work through apps and platforms.
3. Capital over labour: Production has become more capital intensive, using more machines per worker, which weakened workers’ bargaining power. Wages grew slower than profits, so inequality rose.
4. Stalled crowding in: Public spending on highways, airports, freight corridors and ports cut logistics costs, but it has not crowded in, meaning drawn in, private investment. Firms repaired balance sheets and returned money to shareholders instead.

What does the rise of millionaires signal?

1. Dollar millionaires: India has 9.4 lakh dollar millionaires, per the UBS Global Wealth Report, placing it alongside Switzerland and just behind Spain.
2. Premium and foreign spending: Richer households will speed up premiumisation, a shift toward costlier goods. They will also raise demand for foreign exchange for overseas education, investment and travel.

Challenges

1. Power infrastructure gap: Solar output was curbed this summer because storage and transmission have not kept pace with generation, which threatens reliable power for factories, data centres and artificial intelligence (AI).
2. Learning deficit: Workers leaving farms often lack skills for factory and service jobs. Eg. The Annual Status of Education Report (ASER) 2024 shows weak reading in primary classes.
3. Widening income inequality: Income gaps are growing faster than consumption gaps. Eg. The World Inequality Database’s income Gini, where higher means more unequal, rose from 52 to 61.

Way Forward

1. Labour-intensive manufacturing: The Centre should use the Production Linked Incentive (PLI) scheme and Make in India to move workers from farms into globally competitive factories.
2. Private investment revival: Stable policy and quick approvals should draw private investment into the capacity that public infrastructure has made viable.
3. Storage and transmission: The power sector should invest in storage and transmission so supply keeps pace with solar capacity.
4. Skilling at scale: Pradhan Mantri Kaushal Vikas Yojana (PMKVY) 4.0, the Centre’s skill training scheme, and apprenticeships should align training with industry demand.

Conclusion

India is growing, but its workers are not moving into productive jobs fast enough to build a broad middle class. Whether private capital and job-rich factories follow public infrastructure will decide how soon India leaves the lower-middle income group.

What is Inclusive Growth?

1. About: The Organisation for Economic Co-operation and Development (OECD) defines inclusive growth as growth distributed fairly across society that creates opportunities for all.
2. Significance: It widens access to education, health, skilling and markets, so more people share in rising output.
3. Measures: Common measures include the Gini coefficient (0 is perfect equality, 100 perfect inequality), the Multidimensional Poverty Index and the Human Development Index.

Matching Previous Year Question

“[2025, GS3, 10 marks] Distinguish between the Human Development Index (HDI) and Inequality-adjusted Human Development Index (IHDI) with special reference to India. Why is the IHDI considered a better indicator of inclusive growth?”