Source: TH
Subject: Poverty and Developmental issues/Economy
Context: A recent World Bank policy paper has sparked a significant debate on India’s growth model, arguing that while the country is successfully lifting millions out of extreme poverty, it is creating a vulnerable middle trapped just above the poverty line.
About Rise in middle class vulnerability:
What it is?
- Middle class vulnerability refers to a state where individuals have crossed the official poverty threshold of subsistence but lack the stability, reliable income, and social protections to move into a secure middle class.
- Instead of achieving upward mobility, these households remain in a vulnerable zone, characterized by volatile earnings and a lack of durable improvements in living standards, making them highly susceptible to falling back into poverty due to economic shocks.
Key Data and Statistics:
- Income Stagnation: Data from the e-Shram portal reveals that 94.11% of registered informal workers earn less than ₹10,000 per month, a level insufficient for sustained economic movement.
- Labor Disconnect: Manufacturing shed roughly 24 million jobs between 2016 and 2021, forcing many workers back into the low-productivity agricultural sector, which employs 46% of the workforce but produces only 18% of output.
- Youth & Graduate Crisis: Youth unemployment remains critically high at approximately 45%, while the unemployment rate among graduates is nearly 29%, indicating that education no longer guarantees mobility.
- Household Fragility: Net household financial savings have plummeted to roughly 5% of GDP, while unsecured household debt has risen as families use credit to sustain basic consumption rather than for investment.
Factors Causing the Rise of the Vulnerable Middle:
- Capital-Intensive Growth: India’s recent growth has been driven by sectors that do not absorb labor at a large scale, weakening the transmission mechanism from GDP growth to stable employment.
- Wage-Productivity Gap: Real wages for salaried workers have remained largely stagnant despite improvements in overall industrial productivity, fracturing the link between growth and personal income.
- Informalization of Labor: Fewer than 10% of Indian workers hold formal jobs with social security, leaving the vast majority in an informal economy where earnings are uncertain and growth is limited.
- Premature Deindustrialization: The failure of the manufacturing sector to expand rapidly has stalled the movement of workers into higher-productivity activities, leading to a reverse migration to agriculture.
- Wealth Concentration: While millions remain vulnerable, gains at the top have accelerated, with the top 1% capturing more than 22% of national income, deepening domestic inequality.
Initiatives Taken by India:
- Last-Mile Distribution: Expansion of welfare programs providing subsidized food and essential services to hundreds of millions, significantly reducing extreme deprivation.
- JAM Trinity & Financial Inclusion: Leveraging Jan Dhan accounts, Aadhaar, and Mobile connectivity to provide direct benefit transfers (DBT), reducing leakages in the welfare system.
- Skill India & Production Linked Incentives (PLI): Schemes aimed at boosting manufacturing and equipping the youth with industry-relevant skills to facilitate a shift toward productive sectors.
- e-Shram Portal: The creation of a comprehensive database of unorganized workers to facilitate better targeting of social security benefits and policy interventions.
Challenges Associated with Upward Mobility:
- The Poverty Line Trap: Conventional metrics focus only on crossing a threshold, which can obscure the fragility of households living just above it.
- Financialization of Subsistence: Increasing reliance on high-interest unsecured credit for daily consumption limits the ability of households to build durable assets.
- Human Development Constraints: High child wasting (18.7%) and stunting (35.5%) rates act as long-term barriers to the cognitive and physical development required for future mobility.
- Education-Job Mismatch: A significant disconnect exists between the academic qualifications of graduates and the high-productivity roles available in the labor market.
- Geoeconomic Uncertainty: Global trade volatility and technological shifts (like automation) risk further deepening inequality in emerging markets like India.
Way Ahead:
- Shift in Measurement: Adopt the World Bank’s proposal to measure distance from a reasonable standard of living rather than a binary poverty line to capture true welfare.
- Revitalizing Manufacturing: Create policy environments that enable manufacturing to absorb the 12 million people entering the labor force annually.
- Strengthening Social Security: Extend formal social protections to the informal workforce to reduce the income volatility that prevents long-term planning.
- Linking Productivity to Wages: Implement policies that ensure a fair share of productivity gains are passed on to workers in the form of real wage increases.
- Investment in Human Capital: Focus on reducing stunting and wasting to ensure the next generation has the foundational capacity for economic movement.
Conclusion:
India is entering a demanding phase where the measure of success is no longer just the elimination of extreme poverty, but the creation of genuine upward mobility. Without structural reforms to link growth with stable employment, the nation risks creating a permanent vulnerable middle that can neither fall back nor move forward. Restoring the link between productivity and wages is essential to transform India’s growth story from a narrative of subsistence into one of widespread economic security.
