A New Social Contract

THE UNION BUDGET 2025 has reinforced the government’s commitment to the middle class as a central driver of economic growth and empowerment and the key to the realisation of Viksit Bharat. With a range of fiscal incentives, tax relief measures and policies that aim at enhancing affordability of housing, healthcare and education as well as encouraging entrepreneurship, the Budget recognises the role of the middle class in shaping India’s future. Acknowledging this segment contributes significantly to consumption, tax revenues and job creation, the government has introduced targeted programmes to support homebuyers, digital startups and skill development initiatives. Additionally, infrastructure and social security enhancements ensure a better quality of life for middle-class households, solidifying their position as the backbone of a rapidly modernising economy. By fostering a business-friendly envi­ronment, improving social welfare and increasing disposable incomes, India is leveraging the potential of its middle class to fuel sustained economic expansion and democratic stability.

Political theorists and economists have long emphasised the importance of a strong middle class in sustaining economic and social stability. Aristotle, in his Politics, argued that “the best political community is formed by the middle class”, as extreme disparities between the rich and the poor lead to political instability. His assertion underscores how a well-established middle class acts as a balancing and progressive force, preventing oligarchy or mob rule, and fostering democratic institutions and rule of law. Amartya Sen notes that a society with a strong middle class ensures broader participation in governance, accountability and investment in human capital—lead­ing to sustainable economic growth. His research on capability approach argues that a thriving middle class contributes to education, health and economic resilience.

But who are the middle class? The size of the middle class and the characteristics of its members and their roles in society depend on how we define this demographic. Those in the middle class are indeed often defined by incomes or consumption levels. A practical approach adopted globally is to define the middle class as those whose income ensures financial stability, protecting them from falling back into poverty or being subject to vulnerability. This method offers several benefits. First, it is conceptually rooted in the idea of economic security, making it more meaningful than arbitrary thresholds. Second, it is developed within the Indian context rather than relying on global benchmarks that may not accurately capture local economic realities. Third, it allows for an empirical examination of middle-class behaviour rather than a predetermined membership based on specific spending patterns. By focusing on economic security, this definition provides a more robust and practical framework for understanding India’s middle class and its evolving role in the country’s socio-economic landscape.

PRICE defines the middle class as households earning between ₹5-30 lakh per annum, equivalent to $12.60-76.16 per person per day in 2021, adjusted for purchasing power parity (PPP). A key advantage of this definition is that it identifies the middle class based on economic security rather than rigid income brackets.

The meteoric rise of India’s middle class is a remarkable occurrence over the last four decades. From just 9 per cent of the population in 1995 (94 million people), the middle class has expanded to 40 per cent (590 million) by 2025 and is projected to reach 61 per cent (1,015 million) by 2047. This transformation signifies a profound economic realignment, where a once predominantly low-income economy is steadily transitioning into a middle-class-led consumption-driven powerhouse on a timeline that aligns with Viksit Bharat goals.

A robust middle class propels economic growth by significantly contributing to domestic demand. Unlike the affluent elite who save or invest a large portion of their income, the middle class exhibits higher marginal propensity to consume, directly stimulating industries such as real estate, retail, healthcare, education and tourism. A stronger middle class means more purchases, more businesses and greater economic activity that accelerate GDP growth. Furthermore, the middle class is a pillar of fiscal stability. As one of the largest cohorts of taxpayers, its contributions finance infrastructure development, social welfare programmes and public amenities. With rising disposable incomes, higher tax compliance and consumption-driven revenue, the government gains more resources to develop roads, schools, healthcare facilities, and digital infrastructure—key drivers of sustainable progress.

Beyond consumption and tax contributions, the middle class plays a crucial role in innovation, workforce development and economic diversification. The rapid adoption of technology, growth of small and medium enterprises (SMEs) and the push towards a knowledge-driven economy all highlight the indispensable role of this segment. With India’s push towards a digital economy, the middle class is at the forefront of using and benefiting from digital payment systems, e-commerce and remote working models.

The rise of remote work opportunities and gig economy platforms has allowed middle-class professionals to participate in interna­tional markets, bringing in foreign exchange earnings and technological expertise. Additionally, the growing penetration of digital edu­cation platforms has made quality education more accessible, strengthening the long-term potential of India’s labour force. Availability of advanced skills is the reason why companies are setting up Global Capability Centres (GCCs) in India.

All these changes have enabled the middle class—traditionally seen as risk-averse—to become more entrepreneurial. Given the imperative to generate jobs, there is a need to increase the base of entrepreneurs and producers by boosting the Make in India initia­tive. Policy initiatives that ease the process of formation of manufacturing and export-driven businesses should be prioritised. Already, Production-Linked Incentive (PLI) schemes are enabling middle-class entrepreneurs to invest in high-tech sectors, increasing domestic production and employment generation. Creating opportunities for middle-class entrepreneurs in the services sector in the backdrop of the evolution of AI could further increase their role as job creators and innovators. The recent government-funded generative AI initiative focusing on creating a multimodal Large Language Model for Indian languages is a step in the right direction.

Significantly, the middle class is increasingly looking to ex­pand its entrepreneurial profile beyond services and manufactur­ing into the arena of agri-tech and farming. Given the right inputs and enabling environment, agriculture infused with technology has the potential of changing the farm sector.

While the middle class contributes significantly to the economy, it does remain vulnerable to financial shocks and lacks comprehensive social security coverage. Unlike low-income groups that benefit from targeted welfare schemes, the middle class often struggles to access affordable and quality healthcare, pensions and insurance.

The government has taken progressive steps in the 2025 Budget to address these concerns. New measures for affordable health insurance, retirement savings schemes and unem­ployment benefits specifically cater to middle-class households. Expanding Em­ployees’ Provident Fund (EPF) contribu­tions, tax deductions on health insurance and subsidised credit for small businesses will strengthen the financial security of the middle class and reduce dependence on volatile income sources.

Additionally, a stronger focus on im­proving civic amenities, public transport, urban infrastructure and environmental pollution is called for. This will ease the cost of living for middle-class families, ensuring income is spent productively rather than on expensive private alternatives. With the private sector playing a bigger role, especially in the gig economy, regulatory bodies that safeguard rights of consumers and ensure businesses follow regulations is the next step. The functioning of governmental departments requires continued monitoring as there is a significant risk of squandering goodwill and growth potential if this is not done.

To ensure sustainable growth and to fully harness the potential of India’s middle class, future policies must focus on strengthening economic mobility, enhancing public services and providing social security. A renewed social contract between the government and citizens should prioritise three key areas. First, expanding access to high-quality public services—especially in health, education, water and sanitation—to help aspiring middle-class children develop skills and the well-being necessary for success. Investing in public healthcare will provide cost-effec­tive alternatives to expensive private hospitals, while continued emphasis on STEM education, vocational training and university research equips the workforce for a modern economy. Improving service quality can encourage greater utilisation by the middle class, fostering wider support for sustainable financing. Second, promoting economic mobility by creating robust livelihood opportunities is crucial for ensuring prosperity for the middle class and enabling those below it to rise. This requires not only en­hancing education but also making entrepreneurship more ac­cessible, as it fosters job creation and economic growth. Reforms aimed at closing infrastructure gaps, optimising decentralisation, leveraging urbanisation, and implementing targeted policies for laggard regions will further support upward mobility. This ap­proach can be seen in the Budget’s references to an urban mission and specific initiatives for 100 laggard districts. A more flexible labour market, balanced by reforms that protect workers while encouraging entrepreneurship, can create a dynamic employ­ment landscape. Finally, establishing sustainable social security systems that secure health, employment and old-age insurance will be a vital safety net for middle-class individuals. These mea­sures help protect economic gains, reduce the risk of exclusion, and prevent a more fractured society. They foster social cohesion and stability that will drive growth.

Nearly half of India’s population as­pires to join the middle class, including the median voter. If their aspirations are met, they will combine with the existing 38 per cent of middle-class Indians to represent three-fourths of the country. Strengthen­ing their economic security and address­ing inequality will contribute to long-term economic progress and deliver political benefits to leaders who grasp this mantra. Additionally, fostering innovation and technology-driven industries will open new employment opportunities. By implementing these policies, India can empower its middle class, drive economic resilience, and create a more inclusive future.

India’s middle class is the cornerstone of its economic future. Its expansion drives domestic consumption, enhances tax rev­enues, fuels innovation and ensures political stability. The Budget signals the government’s bid to integrate middle-class interests into policymaking and governance. Without ensuring account­ability and enforcement of the rule of law, the government is at considerable risk of losing the trust of its middle-class citizens, a fate the Budget seeks to avoid. Ensuring access to quality public services, mitigating economic vulnerabilities, fostering entrepre­neurship and building robust social protection mechanisms are essential steps to empower this cohort. A middle-class-friendly economic and social policy not only strengthens household resilience but contributes to India’s broader goal of sustainable and equitable development.

By placing the middle class at the heart of policymaking, India can secure long-term economic stability, promote inclusive growth, and accelerate its journey towards Viksit Bharat—a prosperous and resilient nation by 2047

Economic policyEconomic stabilityhealth insurancehealthcareIndian middle classOpen House 2025pensionsocial securityUnion Budget 2025