Honey, I shrunk the middle class🍯

The great Indian middle class is not just stunted; it’s also shrinking

This is edition 254 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

A 🔒 paid newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia. Someone sent you this? Subscribe to BFO

Good morning,

Exactly a year ago, on this day, we made a big assumption. The pandemic had hit us square in the face, and existential health worries had mingled with material questions: are we giving our readers the most articulate, sharp and constructive news about the pandemic?

Huddled over our blue screens, a bunch of us within The Ken—writers, engineers, product managers (fine, MBAs) across three different countries—took a mad leap of faith into the unknown. And a daily newsletter, Beyond The First Order, was born. 

At a year old, BFO has made substantial gains I’m very proud of: we’ve built a great team, a financially stable product, and covered consequences of and beyond the pandemic with our unique blend of newsiness and writing smarts. But nothing gets me more misty eyed than when readers write back calling BFO a “daily habit”. 

We’re well aware that there’s newsletter/Substack fatigue in town. So we’re extra thankful to all our subscribers for showing faith in our nascent product, sticking by and helping us improve every issue, day-by-day, with feedback. We live for the bouquets, brickbats et al. 

We launch into a new year, with maybe even more uncertainties and unintended consequences to trawl through. But you can always count on your “daily habit” to help you make sense of it. Let’s go!

The great Indian middle class is not just stunted; it’s also shrinking

Contrast this headline with what appeared on the website of the World Economic Forum in 2016: 6 surprising facts about India’s exploding middle class. It’s a section of India’s population that even consulting company McKinsey called the “bird of gold” in 2007.

Sure, our headline does not paint a pretty picture. But rather than portray a grandiose picture of a middle class that all of India, its legacy businesses, and its startup ecosystem is targeting, what’s closer to reality is that the Indian middle class, frankly, does not exist. 

Let me explain.

A couple of weeks ago, Pew Research Centre published an analysis showing that, “the middle class (people with incomes of US$10.01-20 a day) in India is estimated to have shrunk by 32 million in 2020 as a consequence of the downturn…meanwhile, the number of people who are poor in India (with incomes of US$2 or less a day) is estimated to have increased by 75 million because of the COVID-19 recession.”

The easiest thing to do now is to shrug, blame the pandemic and move on. After all, India has got a lot going in its favour, no?

One of the fastest-growing economies; extremely favourable demographics with a median age of 29 years; rising incomes.

Check, check, and check. So it’s only a matter of time before the country picks up again and overtakes China. 

But here’s the thing. While the pandemic brought the phrase “K-shaped recovery” to the economic lexicon, for India, this K-shaped growth has been an economic reality for far longer. The standard global definition of what constitutes the middle class are those who live on an income between US$10 and US$20 a day. And that income likely captures only the top 2% of India’s population. The rest of India’s population falls below that.

So, where is India’s middle class? The people who’re meant to be part of the lifestyle associated with air conditioners, cars, and credit cards.

Well, economists like Sandhya Krishnan and Neeraj Hatekar say that the make-up of this middle class is different from what everyone believes.

"These include the informal sector workers such as construction workers and people from the disadvantaged caste groups. Most importantly, we need to understand that the conventional idea of the middle class- of the educated, upper-caste groups - does not hold true anymore."

So while this is a class of people who’re aspirational, they haven’t really been able to break the barriers that’ll propel them to the next level in terms of income. In fact, the pandemic may have actually pushed them back, as seen by a decrease in the middle-income and low-income categories.

Shortly after India’s independence, close to 35% of national income went to the richest 10% of India, while the middle class’ share was over 40%. After the liberalisation reforms of the 1990s, things took a sharp turn. The share of income of the top 10% jumped and is now close to 60%, while the share of the middle class dropped to 30%.

While data from China isn’t so stark, even its middle class—which Pew Research shows in a much more flattering light when compared with India—isn’t out of the woods yet. Less than a third of China’s total population falls into the middle-income group. And it’s something their political leaders are only too aware needs to change to avoid the middle-income trap.

Vice-Premier Liu He, the top economic aide to Xi, wrote in the state-backed People’s Daily last week [November 2020] that the “expansion of middle-income groups has a fundamental role in forming a strong domestic market” and so China must “expand the middle-income group and strive to make per capita income grow faster than the broader economic growth rate.”

Going back to McKinsey’s ‘bird of gold’ moniker, here is an example that captures the middle-class dilemma for companies and India. 

“The question isn’t whether Zara or H&M can open 50 stores in India. Of course they can. The question is whether they can open 500,” says a banker who asks not [to] be named, on the ground that it is best not to be seen questioning the Indian middle-class narrative. “You can try to push beyond the 50m people who have money, but how profitable would that be? Companies can expand for a time, but the limits to growth are getting obvious.”

Sure, incomes have been rising, but that’s accruing to the rich in India. And there are a great many more who have risen above the poverty line, but they still just about manage to make ends meet. And between these two, India’s middle class is disappearing.

As economists Vijay Kelkar and Ajay Shah wrote in their book In Service of the Republic: The Art and Science of Economic Policy, India’s challenge is to become rich before it becomes old. 

PS: There may be lessons to learn from Poland, which moved from middle to high income in less than 15 years.

MobiKwik will make RBI go ‘I told you so’

India’s banking regulator, the Reserve Bank of India, in March 2020, set the cat among the payments pigeons. It said that no merchants, including payments gateways and aggregators that process payments, should be able to store card details. Only banks should be able to store card details. 

That meant no more single-click checkouts. Storing card details is what makes recurring payments for subscriptions like Netflix, or your weekly grocery shopping, or buying the newsletter you are reading, easy. The merchants even put up a spirited fight. In a representation to the regulator, they said they follow the highest of payments standards, and that at least the top-tier merchants should be allowed to store cards. 

The RBI said, nothing doing. 

"The regulator is of the view that merchants storing credit card data would cause cyber security risks to the consumer and they do not have any locus standi as these norms pertain to payment aggregators and gateways," said an official in the know.

Banks have begun notifying their users that they will not be able to process any standing instruction for recurring payments from 1 April. 

And as if to make RBI super smug about its decision and go ‘I told you so’, user data of payments app MobiKwik was dumped on the internet. That too, just days before the rule is enforced.

Usually, data from a leak is available for sale on the dark web. This time around, the hackers published the user data for everyone to see for nearly 12 hours. Users simply had to query a temporary search website created by the hacker for users to check if their details were part of the data stash.

The hacker did this to prove a point to the company. The company was told about this data leak on 4 March. It denied the leak. 

A user The Ken spoke with said their emails IDs, hashed passwords (scrambled version of passwords), credit card details, GPS location details, a list of the apps that were available on their device, were all leaked. Moreover, the leaked details also show when the user created their MobiKwik account, which matched with the timestamp of the welcome mail the company sent to users. 

MobiKwik argued that this detail could have leaked from any other platform, and the hacker simply labelled it as MobiKwik’s users.

Some hackers have reported that their data is visible on the darkweb. While we are investigating this, it is entirely possible that any user could have uploaded her information on multiple platforms. Hence, it is incorrect to suggest that the data available on the darkweb has been accessed from Mobikwik.

The company, which is IPO-bound, said it is going to conduct a third-party audit to resolve this. While it does that, what remains unchanged is that users’ data has been leaked and is floating out there for anyone to reach out and grab. 

So now, merchants may as well kiss goodbye to any chance they had of convincing the RBI about their server security.

The PLI scheme and the perils of its USP

If you’ve been reading us for a while, you’ll know that one of our favourite subjects has been India’s production-linked incentive (PLI) scheme to encourage local manufacturing. We wrote about it here, here, here, and here. And not without reason, of course. 

The PLI scheme has an outlay of US$27 billion over the next five years. More importantly, it’s unlike any earlier attempts at convincing companies to produce in India. Both in the way its incentives are structured—on incremental sales over a base year—and in its careful selection of businesses—like mobile handsets, laptops, drugs, and textiles—with export potential. 

But increasingly, what made the scheme stand out is weighing it down. 

Fifteen of the 16 mobile handset and electronic component makers chosen under the scheme in October cannot meet their target for the year ending March 2021. They have cited the global semiconductor supply crunch and shortage of shipping containers, among other reasons.

And the companies want this to be the base year, instead of the year ending March 2020.

If the incentives under the PLI scheme were tied to merely setting up plants, companies wouldn’t be so worried. But here, they know they have little time to lose. The scheme is only for 4-5 years, and hinges on incremental sales, which could be affected both by supply-side constraints and inadequate demand. 

If manufacturers are battling the former now, what happens when demand plunges in India or in any of the other key markets? Or if India’s relations with one of its key export markets are temporarily strained? The companies are likely to once again make an appeal to the government for similar concessions. 

Then, there is the question of what exactly is the government’s primary objective with the PLI scheme. Prime Minister Narendra Modi has said the scheme will increase India’s manufacturing output by US$520 billion in the next five years. While one of the goals of the scheme is employment generation, Arvind Panagariya, the economist and former vice-chairman of the government think-tank Niti Aayog, wonders if jobs are the top priority under the scheme. This is what he said in a recent interview with the news channel CNBC-TV18:

“(T)hese schemes really are about how much investment you can do, then automatically biases the scheme towards highly capital intensive sectors and so the job creation then gets the back seat in that kind of process so those are the kinds of reservations that I have.”

There is a lot at stake in the success of the PLI scheme, both for the government and for India’s global competitiveness. If only mere incentives could make that happen. 

Franklin Templeton is running to the headmaster and sullying its ‘good’ name

The Indian mutual fund industry has been a revolving door for international mutual fund managers. They come, they see, and inevitably, make their exits—Goldman Sachs, Morgan Stanley, JPMorgan, Fidelity, PineBridge, BlackRock…the list goes on. 

But Franklin Templeton stayed put since 1996. And it was rewarded. It was the seventh-largest asset manager in India by 2016. A Financial Times column had then said that patience was the key to FT’s success in India. 

But then, April 2020 happened. FT shuttered six of its debt funds overnight. Almost a year later, an audit alleged unsavoury practices and this landed FT in hot soup. We wrote about it earlier this month, and said that the future of FT looks to be six-feet under.

Well, it may have just got a whole lot worse for them. 

The Economic Times reported yesterday that FT is tapping diplomatic channels—the Indian Ambassador in the US—to seek a fair hearing from the capital markets regulator, the Securities and Exchange Board of India (Sebi). 

It’s usually not a good image for any company to go that route, and against a market regulator. Especially when it involves a note which seems like a thinly veiled threat about job cuts in its India operations. Until now, its equity mutual funds, which are managed by a distinct team sitting in the southern Indian city of Chennai (an anomaly since most fund management teams are based out of Mumbai), have escaped the wrath of investors. 

If the chatter on Twitter is anything to go by, that could change. 

Sure, if FT decides to exit the country, there will be job losses, but it won’t be the first time a foreign fund house has packed its boxes and left. It won’t hurt India.

PS: The thing about Twitter is that it’s easy to make tall claims. Remember when everyone wanted to sell off or break their Chinese-made products last year? Shortly after that, electronics manufacturer Xiaomi recorded its best festive sales in India.

That’s a wrap for today.

Don’t forget to write in with your thoughts and observations on how this pandemic is reshaping businesses, societies, and economies. We will be back tomorrow.

Thank you for supporting Beyond the First Order, and we hope you keep cheering us on. We are accepting congratulatory messages at [email protected].

Stay safe,
[email protected]

Read the full edition. Sign up now.

Receive our premium newsletter, Beyond The First Order delivered to your inbox every weekday for the next 30 days.

If you’ve already signed up, just enter your email below or login using Facebook or Google

Recent Editions of Beyond The First Order


How often is Beyond The First Order published?

Five days a week. From Monday to Friday.

Do I need to login to the website to read the newsletter?

Nope. We send the day’s edition right to your inbox, where you can read it in full.

I have already paid for a subscription to The Ken. Do I need to pay separately to read this newsletter?

Nope. Paid, premium subscribers of The Ken get our newsletters delivered for free.

My corporate or campus has paid for a subscription to The Ken. Do I need to pay separately to read this newsletter?

Nope. You have complete access to our newsletters for free.

How do I pay to access your newsletters?

In two ways. You can buy a premium subscription to The Ken here which will give you access to all our stories and newsletters. Or you can purchase each newsletter for Rs. 99 or $2/month.

What modes of payment do you accept?

We accept all major international credit and debit cards. Your payment will automatically recur every month if your card supports it. You can stop this anytime from your Account section.

How are your newsletters different from your stories?

Our stories are typically long, originally reported, narrative and analytical in nature. Our newsletters are more timely and help you connect the dots on recent events.

I am a premium subscriber to The Ken but I am not receiving your newsletters. Can you help?

Sure. Just write to us at support at the-ken dot com. We’ll get this fixed.

Can I claim GST credit for this subscription?

Of course. Just enter the GST details during checkout, and you’ll get a GST invoice from us.