Diversity Asia

Rising up the Middle Class: India Moves Toward Becoming an Economic Power

The image of India is often one of extreme poverty and a struggling economy. The federal government is changing that image with definitive reforms to move people into the middle class.
— By Anna Gonsalves

Saying change is never easy for people is an understatement, and in India, it is more of a challenge than most developing countries face. With approximately 1.37 billion people and a federal parliamentary democratic republic form of government, Prime Minister Narendra Modi has taken on the enormous challenge of modernizing the country, attracting foreign investors, and growing the middle class.

With a big shift in focus on high productivity sectors, like services and industry, and increasing consumerism, international businesses have a variety of opportunities to grow their businesses while accelerating India’s economic growth.

Past and Future Decade of Growth
Modi became prime minister in 2014 and has strived to bring economic reform to the country.

In the previous five years, he instituted numerous improvements to benefit the economy and raise people out of poverty. They include modernizing the tax system, bankruptcy laws, and government processes. Modi also improved the lives of hundreds of millions of people by investing in public transportation, airports, roads and sanitation system. Under Modi’s leadership, savings rates, services industries, productivity, and government and foreign investments have risen.

Economic analysts are predicting India’s economy will grow significantly during the next 10 years, if the prime minister can now grow the manufacturing sector by reforming labor laws. One projection says the GDP could grow from $2.7 trillion in 2019 to $8.4 trillion by 2030. This would make India’s GDP the third largest after China and the U.S. Growing the economy by 8 percent assumes Modi’s reforms of the banking sector, tax structure, and bankruptcy come to fruition and stimulate manufacturing and foreign investments.

Modi has been instrumental in growing India’s middle class already, but expanding manufacturing industries, combined with increasing education attainment levels, will lead to hundreds of millions more people joining the labor force.

But there are even more reasons people will reach the middle class. There are a number of strategies being employed that directly target the low-income population. They include improving access to health services, financial inclusion through bank accounts, sanitation and transportation systems, affordable housing, and increasing the inclusion of women in the labor force.

The goal of India’s government has been to make India a manufacturing hub for multinationals but has been unable to succeed to date.
Growing Middle Class Increases Consumerism
To size the projected growth of the middle class, the number of lower middle-class households grew by 46 million between 2005 and 2018. For the same time period, the number of upper middle-income households grew by 45 million. By 2030, there could be 70 million fewer low-income households and 42 million more lower- and middle-income households.

The increasing household income drives increased spending on goods and services. The projection is that there could be an additional $2 trillion in additional spending on mid-priced consumer items and another $2 trillion of spending shifted to more premium product lines

India is aging slowly also – slower than most of the rest of the developing world. This will impact how consumers spend money. Indian consumers will spend more on upgrade to premium items like organic food items, health and personal care, dining out, alcohol, formal wear, communication technologies, health and fitness, travel, and entertainment.

The picture is not all positive though. India struggles to overcome the inequality linked to hundreds of years of a caste system and tens of millions of people locked into poor rural areas where education, transportation, and food are limited. There is a need for educational and skills training services. The other issue is that most workers are not covered by social protections, like retirement programs, unemployment allowances, pensions and health insurance.

Labor Reforms in Process and More to Come
The goal of India’s government has been to make India a manufacturing hub for multinationals but has been unable to succeed to date. Labor reform efforts are being met with resistance because current proposals are said to benefit the companies more than the workers.

The effort to reform central labor laws includes simplifying the 100 central and state laws into four labor codes that regulate wages, define industrial relations, address occupational safety and health and working conditions, and regulate social security. The proposal for the four codes has been published for the public, and like any democracy, there are groups that object to some of the schemes concerning strikes, right to fire employees, spending on health benefits, and so on. However, it is good the country is hashing out labor reforms because it is the only way to keep propelling the economy forward.

In 2016, McKinsey & Company identified opportunities for growth and transformation of India. They are: Addressing acceptable living standards for all people and not just the poorest of the poor; sustainable urbanization; increasing manufacturing operations to create jobs; using technology to raise productivity and improve delivery of healthcare and education; and unlocking the potential of women. It is estimated that striving for gender parity in the workforce could add $700 billion to the GDP by 2025.

Country of Multiple Opportunities
The government is working on all of these opportunities which equates to opportunities for national and foreign investors. India has so much potential and is sincerely working to reach its potential as an economic powerhouse.

Over the past year, India’s federal government has been liberalizing foreign direct investment to attract investors. In August 2019, the new policies opened up investment areas in digital media, coal mining, associated infrastructure and sales of fuels.

The new policies are just one set among many focused on helping citizens reach middle class status through the advantages that economic growth brings. Innovative entrepreneurs and businesses have unlimited opportunities to help India expand its economy while growing their own businesses.