India’s shrinking middle class: policy must double down on strengthening the economy's backbone

These scores represent a sharp structural widening of inequality, especially driven by increased wealth concentration.

The middle 30-70% of earners—an appropriate proxy for India’s middle class—accounted for about 19.7% of total wealth and 28.9% of total income in 1989. By 2024, those shares had fallen to 13.6% and 18.8%, respectively.

A compression of this magnitude is not an accidental outcome but a fundamental redistributive shift: The top 10% now capture close to 59% of total income and have about 65% of total wealth, up sharply from roughly 36% and 50% in 1989, with the top 1% showing a further skew within this group. These gains expose a redistribution away from the country’s middle band.

The roots of this divergence lie in the structure of India’s growth, often described as ‘jobless.’ Economic expansion in the post-liberalization period has been driven largely by capital- and skill-intensive sectors, where returns accrue disproportionately to owners of assets.

Wealth, unlike wages, compounds over time through equity, real estate and business ownership, allowing those at the top to pull further ahead, while the middle class, dependent primarily on labour income, sees far more linear and limited gains.

This divergence is reinforced by the state of our labour market. A large share of the workforce remains trapped in low-productivity agricultural and informal jobs, with only a small fraction employed in manufacturing—the sector that ideally underpins middle-income expansion.

Instead, growth has been services-led, generating high-skill, high-income opportunities at the top but too few stable middle-income jobs in between.

There is also a divergence within labour itself: a rising share of workers in low-productivity self-employment and falling real wages at the bottom co-exist with income concentration among higher-paid segments, weakening the inclusiveness of growth.

The crisis may deepen with the rise of AI, as it renders many low-productivity jobs redundant.

Most importantly, India’s education system has not kept pace. The lack of quality, broad-based education is likely to be the key: inter-generational mobility along the educational ladder has been low and constant since 1991 (Asher et al, 2022). Research also confirms (Bharti and Yang, 2024) that educational inequality explains a quarter of wage inequality in India. Public policy has further accentuated this compression.

While welfare programmes have rightly supported the bottom 50%, the middle 40% has largely been left out even as it faces rising costs of private healthcare, education and housing. The result is a structural squeeze, where the middle is caught between limited income growth and cost escalation.

In most successful development experiences, the middle class expands both in size and its share of income. But in India, the pattern seems inverted. Growth has delivered modest gains at the bottom and disproportionately large gains at the top, while the middle has steadily lost relative ground.

This has important structural implications. Unlike the export-oriented growth paths seen in East Asia, India’s post-1991 model has depended on domestic dynamics characterized by middle-class consumption driving demand, demand supporting job creation and employment feeding back into consumption. That dynamic is losing momentum.

The challenge is not merely to sustain high growth, but to reshape its composition so that these gaps close. Without a strong middle, consumption weakens, upward mobility slows and inequality becomes self-reinforcing, undermining the sustainability of growth itself.

The author is professor, Madras School of Economics.