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In 2021, as a result of the pandemic, households across India experienced a sharp rise in overall indebtedness levels.
Rising out-of-pocket medical expenses, crashing incomes, waning savings, higher rental costs and the increase in prices of basic retail consumer goods contributed to this trend – and have continued to.
This has resulted in a consumption slump in low- and middle-income groups in semiurban and urban India.
After pandemic lockdown restrictions were eased, India’s middle-class consumers – who had their salaries credited into their accounts but could not spend any of it on travel –enjoyed a slight uptick in consumption behavior.
Some described this trend as “revenge or pent-up consumption”. It gave an impression of an economic recovery.
But this short wave of optimism did not last long due to deeper structural factors at play. What looked like a rebound was actually the beginning of a deeper and longer-lasting decline in the financial security of India’s middle class – individuals or households with an annual income between Rs 5 lakh and Rs 30 lakh (approximately $6,000-$36,000).
One of the biggest problems affecting middle-income groups is that their incomes have stopped growing at the rate at which their expenses are rising. There is no longer a corelation between productive work and income gains.
The impact of technological disruption on the labour market and poor job creation have also contributed to wages becoming more sticky and rigid.
Adding to the difficulties of those seeking good employment opportunities is jobless growth. In addition, labour-intensive employment opportunities continue to stagnate in urban areas, while youth unemployment remains particularly high.
According to income tax data and other reports, the average income for middle-class earners has stayed around Rs 10.5 lakh per year for more than ten years now. Adjusted for inflation, the real value of their earnings has dropped sharply.
The consumer purchasing power of this income group has fallen by about one-third over the past decade. This means people can afford much less today than they could ten years ago, even though their salaries have stayed the same. As a result, many families are cutting down on essential expenses like healthcare, education and daily consumption just to balance their monthly budgets.
The cost of living has also gone up significantly in this period. The prices of basic goods and services such as fuel, medical care, and school fees have risen faster than wages. For a section of society that once believed in saving and gradually improving their lifestyle, just making ends meet has become a struggle.
But the pressure is not just economic.
The constant stress of trying to manage monthly expenses with limited income is taking a mental toll. Many middle-class families live with daily financial anxiety – the worry of emergency expenses, the guilt of cutting corners and the fear of slipping further down the economic ladder. These burdens rarely appear in official statistics.
Government policy, so far, has not responded meaningfully. The new tax regime in Budget 2025 raised the zero-tax limit to Rs 12 lakh. While this sounds like major relief, it helps only those who do not claim exemptions and deductions.
For most middle-income earners who rely on housing loan deductions or savings-related exemptions, the benefit is small or even negative.
Together, these data-trends show that the average middle class person is losing their economic strength and socio-emotional stability. What was once recognised as an aspirational class known for planning, saving, and striving is now borrowing, and struggling just to stay afloat and this indicates a serious concern.
Structural abandonment
The hidden debt accumulation and its explosion currently gripping India’s lower-middle class – households earning between Rs 1.25 lakh and Rs 5 lakh annually – is an inevitable outcome of sustained policy neglect, weak financial regulation and the absence of a social safety net.
Over the past few years, nearly every economic pillar that once provided stability to this demographic has either crumbled or turned hostile: these include real wage growth (income adjusted for inflation), schemes provided credit-backed guarantees offered by the government to small and medium scale enterprises on which members of the lower income group are reliant for job creation.
This has resulted in a structural financial crisis playing out quietly in Tier-2 cities, salaried households and for smaller entrepreneurs, many of whose firms are on the edge of insolvency.
In early 2025, household debt in India stood at 23.9% of GDP, up from 23.1% the year before, according to Morgan Stanley. This figure conceals a dangerous underlying trend: the bulk of new borrowing is concentrated in unsecured personal credit, especially among vulnerable lower-income households.
Worryingly, nearly 33% of these loans are being used for essential consumption, groceries, medical expenses and school fees rather than to create productive assets.
At the same time, net financial savings remain at a historic low, having fallen to 5.3% of GDP – the lowest in around five decades. This suggests that families are not only borrowing more, but also saving almost nothing, leaving them acutely exposed to even minor economic shocks.
This erosion of financial resilience has unfolded in full view of India’s top economic institutions. The Reserve Bank of India, though responsible for overseeing credit health, acted only in late 2023, increasing risk weights on unsecured personal loans by 25%. While this was a clear signal of institutional concern, it was both belated and insufficient.
Credit card non-performing assets (or credit card debt that cannot be recovered) surged by 28.4% year-on-year, reaching Rs 6,742 crore by December 2024. Outstanding credit card debt has more than doubled, to Rs 2.92 lakh crore that year from Rs 1.4 lakh crore in 2020.
The Ministry of Finance, too, has failed to meaningfully engage with this unfolding crisis. There is also very little the government is doing to actually study this issue.
While Union Budget 2025 expanded the zero-tax threshold to Rs 12 lakh, this tax-base centered relief is only available to those who hav chosen to be assessed under the new tax regime. This does not allow them to claim exemptions for housing loans, insurance premiums and education.
In effect, this policy offers little to no real benefit for lower middle-class families who depend on these deductions to stay afloat. Worse, borrowing taken by those more likely to default on their debt has surged, with 68% of subprime borrowers under financial distress, many of them borrowing afresh to repay previous loans, reported Bloomberg.
Yet, there is no targeted financial literacy or credit regulation framework in place to stop this vicious cycle.
Delinquency is now rising even among the smallest loan segments. Defaults on personal loans under Rs 10,000 rose 44% between December 2023 and mid-2024, underlining just how fragile household balance sheets have become.
Collapse of job creation
The root of the middle-class crisis lies not in laziness or lack of ambition but in the collapse of job creation and income mobility. As economist Arvind Subramanian notes, many Indians are not paying taxes simply because they do not have enough income to be taxed.
Budget 2025’s increase of the zero-tax threshold is practically irrelevant for millions who are either underemployed or entirely jobless. With graduate unemployment at over 40%, the core middle-class assumption – education in exchange for economic security – has failed.
White-collar jobs too are being steadily eroded by automation, outsourcing and informalisation.
In the face of this vacuum, the middle class has turned to whatever short-term relief is available. From “buy now pay later” schemes to rolling credit card payments, financial survival now depends on fragile credit arrangements.
A significant number have begun redirecting capital from traditional savings into high-risk investments like small-cap stocks and futures and options trading, often using borrowed money. This shift reflects not confidence in markets but desperation and lack of better alternatives.
What makes this crisis more severe is that there is no real safety net for the middle class. The poor, at least on paper, receive welfare benefits, ration subsidies and direct cash transfers. The wealthy enjoy capital buffers, tax shields, and advisory networks.
The middle class, however, is caught in-between – too privileged to qualify for welfare but too financially fragile to withstand economic shocks. There has been no structurally innovative policy that speaks to this segment.
Private healthcare is costly, unemployment insurance is non-existent and housing is increasingly unaffordable.
Into this policy vacuum has emerged a different kind of coping mechanism, identity politics. A large section of the middle class, feeling economically powerless, has gravitated toward religious nationalism, cultural pride, and symbolic victories.
The elections last year in Maharashtra and Haryana showed how economic anxiety can be overwhelmed by displays of faith, national pride, and spectacle.
Governments have substituted structural reform with sentiment and this shift has found willing participants. This is not ideological allegiance but psychological refuge. It fills the emotional void left by economic failure.
Strategic reforms
However, this decline is reversible. What the middle-class needs is strategic policy reforms that offer stable jobs, affordable healthcare, regulated credit access – and mental health support. A recalibrated economic vision that sees the average middle class not just as taxpayers or consumers but as citizens worth investing in remains more vital now than ever.
A middle-class that regains confidence, security, and purpose is not just good for growth but it is vital for democracy itself.
Deepanshu Mohan is Professor of Economics and Dean, IDEAS, OP Jindal Global University.
Ankur Singh and Geetali have contributed to the column.
This article first appeared on Scroll.in
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