Three-Track India

India is now officially recognised as the world’s fifth largest economy, ahead of Britain and France and just behind Japan (no. 3) and Germany (no. 4). At their current respective GDP growth rates, India will overtake Germany in 2026 and Japan in 2030 to become the world’s third largest economy after the United States and China.

But there are troubling caveats. India is the poorest nation among the top three. Its per capita income at current exchange rates is just under $2,500. Per capita income in the US is $65,000. In China it is $12,000.

The number of absolute poor in India has declined gradually over the decades. In 1947, the number was over 80 per cent. In 2022, several surveys put the figure at around 10 per cent though there are wide variations.

High average annual GDP growth of around seven per cent over the past 20 years has created in effect three Indias. At the top is a thin slice of perhaps 100 million Indians comprising less than 10 per cent of India’s population with a per capita income at current exchange rates that is in the range of $15,000 (Rs 12 lakh) a year. That places them in the category of mid-income countries in Latin America and parts of Southeast Asia.

The contribution of this thin slice of relatively affluent Indians to total GDP (100 million x $15,000) is roughly $1.50 trillion. They will thus contribute over 40 per cent to India’s estimated total GDP of $3.60 trillion in 2022-23.

This lies at the heart of India’s income inequality. Those at the top of the pyramid are relatively rich. The rest are relatively poor. But there is a slice in the middle of the two extremes: the aspirational middle-class. Its per capita income of around $5,000 at current exchange rates is double India’s average per capita income of $2,500. The middle rung comprises approximately 200 million Indians. Their contribution to total GDP (200 million x $5,000) is $1 trillion.

Thus the top two slices of India’s demographic pyramid consist of 300 million people. They account for $2.50 trillion of India’s $3.60 trillion GDP. That leaves us with a GDP of $1.10 trillion shared by the largest base of this pyramid: 1 billion Indians contributing $1.10 trillion to economic output. 

That translates into a per capita income of $1,100 or Rs 88,000 per year (Rs 7,350 per month) for a large majority of our population. It explains the dehumanising poverty in our urban slums and villages. It also explains the wide gulf in living standards, nutrition and access to medical care and education between the three Indias.

The top 100 million have relatively affluent lifestyles, travel in India and abroad, receive good medical care and send their children to well-run schools. The middle slice of 200 million Indians aspires to all of this and is close to achieving it.

But what about India’s poorest billion? At five persons per household, they are part of 200 million Indian households.

Fortunately, the numbers hide a key fact. The low average per capita income of Rs 7,350 per month calculated at Rs 80 to a US dollar goes much further once per capita income is converted into purchasing power parity (PPP).

The International Monetary Fund (IMF) and World Bank (WB) have fixed 2.8 as the PPP multiplier for India. For the US it is 1.00; for most European countries, it varies between 1.00 and 1.10; for China it is 1.50.

Using this IMF/WB multiplier, the average per capita income (PPP) of India’s 1.3 billion-plus people is $9,000 (Rs 7.20 lakh) a year. This average income, however, is distributed unevenly over the entire population. It causes the wide disparities we see in everyday life in especially urban India. It is the principal cause for the creation of a three-track India with an affluent slice at the top of the pyramid, an aspirational middle and a large struggling base. 

The silver lining is that as the economy grows, more and more people are moving up from one part of the pyramid to another. This upward mobility is what makes India’s consumer market so attractive to foreign direct investors. They see 300 million affluent and relatively affluent Indians who can be targeted immediately for consumer sales, offline products and financial services.

But looking forward, they also see tens of millions of relatively poor Indians moving into the expanding middle class as their purchasing power increases.

India now has over 100 million demat accounts. Most are from the top end of the pyramid. The country has one billion mobile phones. With multiple phones per person, roughly 800 million Indians own either feature phones or (in smaller numbers) smartphones.

The average revenue per user (ARPU) is around Rs 160, the lowest by far in the world. At $2 a month for an average feature phone user, even those at the bottom of the demographic pyramid today use mobile phones for data and streaming. 

According to a World Economic Forum report,“By 2030, India will move from being an economy led by the bottom of the pyramid, to one led by the middle class. Nearly 80 per cent of households in 2030 will be middle-income, up from about 50 per cent today. The middle class will drive 75 per cent of consumer spending in 2030.  As 140 million households move into the middle class and another 20 million move into the high-income bracket, they will spend 2-2.5x more on essential categories.”

Not surprisingly, the poorest in India who receive subsidised foodgrains across central and state schemes number 800 million. Most of them fall into the large base of the demographic pyramid. The government’s schemes‒delivered through digital platforms‒provide health insurance, housing, water on tap, last-mile electricity, sanitation and food subsidies. They target Indians who are yet to climb up into the middle of the socio-economic pyramid.

The government’s objective now must be to catalyse this process and convert India into a two-track country: an affluent class and a middle-class, with overall poverty significantly reduced.

The task is complex in a country with wide disparities in incomes and rising political and social tensions. But there is no more important task to secure the future of all Indians.