It is now well known that India’s rural economy is in trouble for a long time. There is enough data to point to the worsening of this crisis. However, unlike the rural economy, there is not much data available about what is happening in the urban economy. This is partly because there is not much regular data on wages or income in urban areas, but also because of the heterogeneous nature of urban economic activity. However, there is still enough evidence to suggest that rural distress has spread to the urban economy, especially the middle class.
Unlike the wage data from the Labor Bureau that tracks the rural economy on a monthly basis, there is no such data for the urban economy. But there are periodic Labor Force Surveys (PLFS) that provide wage income of urban workers. These are available for four years starting from 2017-18, with the most recent being 2020-21. Unlike rural areas, almost half of the workers in urban areas are regular workers who receive regular wages/salaries. They are also part of the so-called urban middle class.
While wage income for casual workers in urban areas grew by 3.3% per year between 2017-18 and 2020-21, it actually declined by 0.8% per year for regular workers. In fact, the earnings of a regular employee in the April-June quarter of 2021 were 3% less as compared to the same quarter of 2018. This decline was a continuation of the trend seen earlier between 2011-12 and 2017-18 when wages for regular employee salaries declined by 1.7% per year. Essentially, a regular employee is earning 14% less salary than a decade ago. Much of this decline was among highly educated workers.
A better way to understand the economic situation in urban areas is to look at the consumer confidence surveys of the Reserve Bank of India (RBI). These are held in major urban centers and are fairly representative of the mood of urban consumers. The RBI survey asks a variety of questions to find out how respondents view their economic situation on various parameters and their expectations for a year ahead. While these are available for most parameters from September 2012, data on intention to spend is available from September 2015. For each question, respondents report whether their current condition has improved, worsened or remained the same. The difference between those reporting improvements versus those reporting worsening is treated as the net response.
As expected, during the turbulent years of ‘taper tantrum’, high inflation and policy paralysis prior to 2014, net responses were mostly negative. Hence most of the respondents felt that their economic condition has worsened. But after the change of government in 2014, it turned positive and remained so till December 2016. It has remained negative since then. In November 2022, 56% of respondents reported that their economic situation had worsened, while only 28% reported improvement. The situation on employment is no different, with the net response being negative over the past six years starting December 2016. On earnings, the net response has turned negative since September 2019. This is also reflected in the intention to spend on essentials and non-essentials. The net response to intention to spend on non-essentials started declining after 2017 and has been negative since September 2019. Given the sharp slowdown in the Indian economy after 2017, these data trends are reasonable indicators of the state of the urban economy. Much of this suggests that urban economic conditions began to deteriorate before the pandemic, exacerbating matters.
Furthermore, economic vulnerability is greater in urban areas due to the lack of comprehensive social protection, unlike rural areas, which benefited from government generosity through increased food allocations, direct cash transfers to farmers, and an employment guarantee scheme. Even for food schemes, most of the migrants remained out of it.
Yet, it is the urban areas that hold the key to economic revival. A crisis is an indicator of declining demand in the economy. A major portion of the demand for discretionary or non-essential spending comes from urban India. With inflation further eroding the purchasing power of urban consumers, we are facing the biggest demand crunch in recent times. Given that our exports are on the decline, external demand is unlikely to improve amid signs of a global slowdown. If the priority of the budget is the revival of India’s economy, then the only option is to help raise the income of our middle class to spur demand.
Himanshu is Associate Professor at Jawaharlal Nehru University and Visiting Fellow at Center de Sciences Humanes, New Delhi
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