India's Middle Class Is Paying for Everyone Else's Growth Story

There's a version of the India story that gets told at Davos, in investment bank reports, and in government press releases. It goes like this: India is the world's fastest-growing large economy, the demographic dividend is kicking in, consumption is rising, and the infrastructure build-out is creating the foundation for the next phase of development. All of this is broadly true.

Here is the version that doesn't make it into the press releases.

The Indian urban middle class, salaried employees, small business owners, professionals, pays among the highest effective tax rates in the developing world, receives among the weakest public services in return, and has watched their savings erode against inflation and a depreciating currency for the better part of a decade. They are simultaneously the engine of the consumption story and the group most structurally squeezed by the policy environment.

I'm not making a partisan argument here. This pattern has held across governments. It's structural, not political.

The tax arithmetic.

A salaried professional earning ₹20 lakh a year in India pays income tax, has PF deducted, pays GST on most of what they consume (18% on a restaurant bill, 28% on a car, 18% on financial services), pays property tax, pays road tax, pays fuel taxes that are among the highest in Asia, and if they invest, pays capital gains tax on returns. The aggregate of this is substantial.

Against this, they receive: public schools they mostly don't use, public hospitals they mostly don't use, roads that vary enormously in quality, and a public transport system that is improving in some cities and non-existent in others.

The formal salaried sector bears a disproportionate share of the direct tax burden because it is the most visible and the hardest to avoid. The agricultural sector, which employs the majority of the workforce, pays no income tax on agricultural income, a policy with origins in the 1950s that has never been seriously revisited. The informal sector, which accounts for a large share of economic activity, largely operates outside the direct tax net.

None of this is secret. The Economic Survey acknowledges the narrow tax base every year. The solution that gets proposed is always broadening the base. What actually happens is that the existing base pays more.

The inflation and currency dimension.

Between 2014 and 2024, the rupee lost roughly 40% of its value against the dollar. For someone whose savings are in rupee-denominated assets and whose aspirations include education abroad, international travel, imported goods, or simply holding value, this is a significant tax that shows up nowhere in the formal tax calculation.

Food inflation over the same period has been persistent and painful. Vegetable prices, in particular, have shown volatility that is structurally harmful to households that spend a significant share of income on food, which is most households. The monetary policy response has been constrained by growth imperatives, and the fiscal response has been largely absent.

The people least equipped to hedge against this (fixed salary earners, retirees on fixed deposits, small business owners with rupee revenues) are the most exposed. The people best equipped to hedge (dollar earners, large businesses with pricing power, holders of real assets) are largely insulated.

What the growth story requires.

Development at India's scale requires choices about who bears the cost of transition. Infrastructure is expensive. Welfare programs are expensive. Subsidies are expensive. Someone pays.

The revealed preference of Indian fiscal policy over a long period is that the urban formal middle class pays a disproportionate share of that cost, while receiving public services calibrated primarily for other segments. This is arguably a rational political economy. The middle class votes but is not the decisive electoral variable in most constituencies, and the policy choices reflect that.

What I find less defensible is the gap between the narrative and the reality. The India growth story is presented as a tide that lifts all boats. For the urban middle class, it has sometimes felt more like a current that moves the boats and asks them to fund the fuel.

What would change this.

Broadening the direct tax base genuinely, not rhetorically. Rationalising GST so that the tax incidence is less regressive. Investing in public services at a quality level that the formal sector would actually use, which would reduce the private education and healthcare spend that currently sits on top of their tax burden. And being honest in policy communication about who is being asked to carry what.

None of these are easy. Some of them require political courage that has been scarce. But the middle class that is being asked to carry this burden is also the one that is most articulate, most connected, and most capable of making its discontent felt over time.

The growth story needs them to stay in the tent. The policy environment keeps testing how long they will.