NEW DELHI, INDIA - Innovative, cheaply priced products targeted at India's booming middle class are helping to spur domestic consumption and growth but the sector remains vulnerable to economic shocks and carefully calibrated policy measures will be needed to sustain income gains in the longer term, says a new Asian Development Bank (ADB) report.
In a special chapter of Key Indicators for Asia and the Pacific 2010, its flagship annual statistical publication, ADB says the ranks of India's middle class, defined as those consuming between $2 and $20 per day (based on survey data in 2005 purchasing power parity dollars), grew by around 205 million between 1990 and 2008, second only to the People's Republic of China.
The surge in numbers has seen additional annual sector spending of $256 million and spawned low-cost, locally produced products and services such as Tata Motor's $2200 Nano Car, the Godrej Group's $70 battery-operated refrigerator, and cheap mobile phone rates.
The special chapter, titled "The Rise of Asia's Middle Class", also notes that the emergence of a substantial middle class in India has created new avenues for employment and entrepreneurship, and a louder voice for improved public infrastructure and services.
At the same time, more than 75% of the country's middle class remain in the $2-$4 daily consumption bracket, the lower end of a range of $2 to $20, leaving them at risk of falling back into poverty in the event of a major economic shock, such as the global financial crisis. Infrastructure constraints, like unreliable power supplies may also hamper consumption of durable goods.
To help unlock the full potential of the Indian middle class as consumers and drivers of growth, the report says the government must continue to remove structural and policy impediments to the sector's development and improve income distribution across the population. Actions should include infrastructure improvements and social safety nets that encourage spending, while providing a buffer during hard times. The government should also put in place policies that stimulate the creation of stable, well-paid jobs, and encourage entrepreneurship and education.
"Policies that bolster the middle class may have benefits not only for economic growth, but may be more cost-effective at long-term poverty reduction than policies that focus solely on the poor," said Jong-Wha Lee, ADB Chief Economist.
The report notes that while a strong middle class is necessary for sustainable economic growth, higher incomes are resulting in environmental pressures and a rise in 'diseases of affluence' such as obesity, which policy makers will increasingly need to address.