Navigating Financial Priorities Amid India's Middle Income Trap
The World Bank classifies countries an economic status based on their gross national income (GNI). India is currently classified as a lower-middle-income country with a GNI per capita between $1,146 and $4,5151. This is despite the fact that India is the world’s 5th largest economy by nominal GDP.
India faces the challenge of the middle income trap - a situation where countries struggle to attain high-income status despite economic growth and falling poverty rates. This is a direct outcome of the average income an individual earns in a country.
While India’s population is divided into different earning groups, such as below the poverty line (BPL) to high net worth individuals (HNIs), the middle class accounts for a large portion. In 2000, 300 million people or 27% of the population, were considered middle class, which increased to 432 million or 31%, in 20212.
This percentage is likely to reach 38% by 2031 and 60% by 20473. This is the population that is often sandwiched in managing finances and walking on tightrope to survive the rising cost of living.
Learn how to build a smart investment plan tailored for the middle class and effectively manage your financial priorities.
The Great Indian Balancing Act
Here is what you need to know about the great Indian balancing act of managing finances amidst the middle income trap.
Monthly Income vs. Monthly Obligations
The Indian middle class faces unprecedented financial pressure in 2025. Data from the National Sample Survey Office shows approximately 65% of total household expenditure is consumed by essential expenses like food, rent, education, and healthcare, leaving little room for savings or investments4.
This squeeze is particularly evident in the alarming growth of household debt (excluding mortgages), with India ranking second globally, with household debt being 32.3% of GDP as of March 20255.
Additionally, real wages have been declining, and for the first time last year, fell below pandemic levels, severely weakening consumer confidence6. As incomes struggle to keep pace with rising costs, many families find themselves turning to credit to maintain their standard of living.
The Growing EMI Culture In Urban Households
Urban India has embraced an EMI-driven lifestyle, often prioritizing immediate consumption over long-term financial stability. Between March 2021 and March 2024, personal loans by the banking sector grew by a staggering 75%, while retail credit from non-banking finance companies and housing finance companies increased by 70%7.
Additionally, with everything available at the touch of a finger digitally, via credit cards, Buy Now Pay Later, zero-interest EMIs, people’s accessibility to buy things on borrowed funds has increased. According to a survey, in the year 2024, 30% of digital transactions were done via credit, with credit cards accounting for 10% and EMIs at 20%8.
This credit-fueled consumption masks the underlying problem: household incomes simply aren’t growing fast enough to sustain both consumption and savings at healthy levels.
The Rise Of The Responsible Borrower
Is this EMI culture entirely problematic, or can debt be leveraged strategically? Let’s see.
Why EMIs Aren’t Necessarily A Bad Thing
Not all debt is created equal. Strategic borrowing can be a tool for wealth creation when used to acquire appreciating assets or enhance earning potential. EMIs provide access to valuable assets that might otherwise be unattainable, allowing for asset acquisition while maintaining liquidity. The key distinction lies in whether debt finances consumption or investment.
Loans As Tools: Home, Education, Vehicles
Certain loans serve as financial leverage for middle-class families:
- Home Loans: Mortgage payments build equity in an appreciating asset while providing necessary shelter
- Education Loans: Investing in human capital can significantly increase future earning potential
- Vehicle Loans: In many urban centers, reliable transportation is essential for income generation
These strategic debts can actually accelerate wealth creation when managed properly, creating a foundation for long-term financial stability despite short-term cash flow constraints.
Read: Are Alternative Investments The Future Of Investing?
Managing Debt Without Derailing Savings
It is recommended that total EMI obligations should not exceed 40-50% of the monthly take-home income. This leaves room for essential expenses, emergency funds, and most importantly, regular investments.
| Income Level | Recommended Maximum EMI Commitment | Minimum Savings Allocation (Approx) |
| INR 25,000-INR 50,000 | 40% of income | 10%- 15% of income |
| INR 50,000-INR 1,00,000 | 45% of income | 15% 20% of income |
| Above INR 1,00,000 | 50% of income | 20%- 25% of income |
When Savings Alone Are Not Enough?
Even with prudent debt management, traditional savings approaches face a formidable opponent: inflation. Here is how.
1. The Inflation Challenge
For February 2025, Y-O-Y inflation, also known as All India Consumer Price Index (CPI), stood at 3.61% while the food price index stood at 3.75%9. With inflation consistently outpacing traditional savings instruments, middle-class families face a fundamental challenge: their money is losing purchasing power over time.
2. Fixed Deposits VS. Real Growth
Fixed deposits, once the backbone of middle-class financial planning, now struggle to provide real returns (returns after inflation). With FD rates averaging 6-7% and inflation hovering around 5-6% (RBI targets 4% with a +/- 2% tolerance band), the real return is minimal, sometimes even negative10.
This means that even diligent savers may find themselves falling behind in terms of actual purchasing power.
3. The Evolving Attitude Toward Wealth-Building
The middle class increasingly recognizes that passive income generation and wealth creation require going beyond traditional savings instruments. This shift in mindset is driving exploration of alternative investment methods with higher growth potential but manageable risk profiles. As this realization spreads, more families are seeking ways to generate income beyond their primary salaries.
Passive Income: The New Middle-Class Dream
Here is why passive income has become popular among the middle class population.
Why Salaried Individuals Seek Alternative Income?
With stagnant real wages and rising costs, salaried individuals are increasingly looking to supplement their primary income and be strategic investors. Passive income streams offer a pathway to financial security without sacrificing primary career focus.
Fixed Returns With Low Risk: The New Gold Standard
For risk-averse middle-class investors, fixed-income assets offering returns higher than traditional savings instruments, yet carrying relatively low risk, have become increasingly attractive.
These options provide a middle ground between the safety of bank deposits and the volatility of equity markets, addressing both the need for income stability and growth potential.
Diversifying Beyond Traditional Investments
There is a wide range of investment options available to investors, such as:
1. Corporate Bonds: These debt instruments, issued by companies, offer higher yields than government securities while maintaining reasonable safety profiles. There are also mutual funds that invest in these bonds, making them ideal for those looking for alternative funds investment strategies.
2. Tax-Free Bonds: Government-backed securities where earnings are exempted from tax under section 10(15) of the Income Tax Act. These typically have 10-20 year maturities with interest rates ranging from 5.50% to 6.50%.
3. Sovereign Gold Bonds (SGBs): Though new issuances may be limited in 2025, existing SGBs provide gold investment exposure without physical storage concerns, plus a fixed annual interest rate of around 2.5% paid semi-annually.
4. Securitized Debt Instruments (SDIs): These financial products transform groups of loans into tradable securities, offering retail investors access to diversified loan portfolios. SDIs provide access to previously hard-to-reach asset classes like personal loans, MSME financing, and housing loans, etc.
Read: 5 Investment Options Better Than Fixed Deposits
Building A Future-Ready Portfolio
To build wealth, India’s middle class requires a more comprehensive approach to portfolio construction.
Smart Allocation: Safety, Growth, Liquidity
When selecting the best investments for middle class, three things should be considered.
- Safety: Emergency funds and stable assets for capital preservation
- Growth: Market-linked investments to outpace inflation
- Liquidity: Ensuring access to funds without penalties when needed
Balancing these three elements creates the best investment plan that can adapt to changing life circumstances while steadily building wealth.
For example, the 70:30 investment strategy. This strategy allocates 70% of capital to equity-based assets and 30% to debt instruments, balancing growth potential with stability. The equity component targets inflation-beating returns, while the debt portion provides stability and income. Based on age group, the ratio changes to accommodate the varying life stages.
Opportunities For Long-Term Wealth Creation
For middle-class investors with a longer time horizon, various investments such as stocks, mutual funds, alternative asset classes, etc., offer the potential for building wealth. For example, 10 top-performing mutual funds through SIP investment routes have delivered 40%+ returns in 202411. However, you also need to select the best SIP to invest in to earn such returns, which requires research.
While past performance doesn’t guarantee future results, growth-oriented options complement the stability provided by fixed-income assets. This creates a balanced approach that can adapt to both current income needs and future wealth-building goals. The key is developing a saving investment approach that systematically builds wealth over time.
Conclusion
India’s middle class faces a unique set of challenges in navigating between debt obligations and investment priorities. The path forward involves responsible debt management, strategic asset allocation, and a diversified approach to income generation. Success ultimately depends on tailoring financial strategies to individual circumstances while maintaining focus on long-term objectives.
Frequently Asked Questions On Middle Class Income Trap
1. Which investment is best for a middle-class family?
The best investment for middle class families depends on specific goals, time horizon, and risk tolerance. For a balanced approach, consider allocating funds across fixed income securities and equity instruments based on risk appetite.
2. What is the 70:30 investment strategy?
The 70:30 investment strategy is one of several popular types of investment strategies that involves allocating 70% of your investment capital to equity-based assets (stocks, equity mutual funds) and 30% to debt instruments (bonds, fixed deposits).
This strategy aims to balance growth potential with stability, making it suitable for investors with moderate risk tolerance who seek higher returns than purely conservative approaches.
3. What are low-risk investment options for salaried individuals?
Low-risk investment options for salaried individuals include Bank Fixed Deposits, Government Bonds, Corporate Bonds, Public Provident Fund (PPF), National Savings Certificates (NSC), Mutual Funds, and more.
References:
1. The World Bank, accessed from: https://datatopics.worldbank.org/world-development-indicators/the-world-by-income-and-region.html
2. East Asia Forum, accessed from: https://eastasiaforum.org/2024/05/21/understanding-indias-evolving-middle-classes/
3. The Economic Times, accessed from: https://economictimes.indiatimes.com/news/economy/indicators/how-the-middle-class-will-play-the-hero-in-indias-rise-as-world-power/articleshow/101608682.cms?from=mdr
4. The Wire, accessed from: https://thewire.in/economy/can-union-budget-2025-save-indias-shrinking-middle-class
5. The Hindu Buisness, accessed from: https://www.thehindubusinessline.com/multimedia/video/india-household-debt-savings-crisis-2025/article69314775.ece
6. Business Standard, accessed from: https://www.business-standard.com/economy/news/india-s-falling-wages-hit-economy-as-consumers-cut-back-on-everything-124112900061_1.html
7. Indian Express, accessed from: https://shorturl.at/36hey
8. Medianama, accessed from: https://www.medianama.com/2025/04/223-nearly-one-third-india-online-payments-2024-based-on-debt/
9. Ministry Of Statistics and Programme Implementation National Statistics Office, accessed from: https://www.mospi.gov.in/sites/default/files/press_release/CPI_PR_12Mar25.pdf
10. PMF IAS, accessed from: https://www.pmfias.com/inflation-targeting-framework/
11. The economic Times, accessed from: https://economictimes.indiatimes.com/mf/analysis/10-equity-mutual-funds-offer-over-40-sip-returns-in-2024/sip-scorecard/slideshow/116254731.cms?from=mdr
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