India trails far behind China in building its middle class: study

09 July 2015

Economic growth has lifted almost a billion people around the world out of extreme poverty over the last decade, although within limits. This was more pronounced in India than elsewhere.

A comparison between India and China, two of Asia's largest economies, shows that while poverty rates have dropped dramatically at the start of the century, in India the number of people living on less than $2 a day continued to remain in the low-income bracket.

Despite the rhetoric about rising middle class and rising income levels in emerging economies, India has failed to usher low-income people into the middle-class the way China did, a new study has found.

The poverty rate in India fell to 20 per cent in 2011 from 35 per cent a decade ago, according to a Pew Research Center study published earlier this week. That is 133 million Indians leaving poverty over 10 years, the second-largest drop globally after China.

Against this, China had only 12 per cent of the population living below poverty line in 2011, compared with 41 per cent at the start of the decade.

In India, the drop in the poverty rate resulted in an increase of 273 million in the low-income population, ie, the number of people with daily income of $2 to $10 rising to 77 per cent in 2011 from 63 per cent in 2001. That means those who left poverty in India didn't go very far.

India's middle class barely expanded during the decade, increasing from 1 per cent of the population in 2001 to 3 per cent in 2011, an increase the study called ''small by any measure.''

In absolute terms, the number of middle-income people grew only by 17 million.

''From these trends, the middle-income threshold appears more like a barrier as only a small share in India stepped across the line,'' the Pew Research center said. ''It is clear from these estimates that India did not keep pace with China in creating a middle class in this century.''

Developing a vast middle class is key to sustaining growth in emerging economies, whose comparative advantage in offering advanced markets products at a fraction of the cost is waning with new technologies.

A large middle class allows for healthy changes in a country's economy, including the ability to increase the share of consumption in the economy, which is considered to be the most stable component of gross domestic product. After succeeding in making China a manufacturing hub, its leadership has recently stressed the importance of expanding consumption to lower the risks of an export-oriented economy.

Despite the breakneck economic growth in India, 97 per cent of the population is poor or low income. In China, despite the more successful policies, the share is still 78 per cent, the study says.

The median daily per capita income in India increased relatively slowly, rising from $2.39 in 2001 to $2.96 in 2011, a gain of only 24 per cent, compared with 126 per cent in China over the same period.

The study attributes the difference between India and China to the timing of economic reforms, which began in 1978 in China and in 1991 in India. The relative depth of the reforms and differences in investment - both domestic and foreign - are probably among other factors leading to divergent trajectories from 2001 to 2011.

Across the world also while poverty has declined, it has not helped the poor to mature into middle class.

Data analysed by the Pew Research Center concluded that more than half the world's population remains ''low-income,'' while another 15 per cent are still what a report issued by the center on Wednesday called ''poor.''

The share of the global poor, defined as those who lived on $2 a day or less, fell from 29 per cent in 2001.

Most of the people in that category, though, took ''only a moderate step up the income ladder,'' the report concluded: 56 per cent were ''low-income,'' in 2011, living on $2 to $10 a day.

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