India’s middle class is now caught in an economic squeeze, warns Saurabh Mukherjea of Marcellus Investment Managers.
As AI slashes white-collar jobs and consumption slows, Mukherjea says the current model “is breaking down,” and the government isn’t equipped to respond.
“Whilst the stimuli highlighted above will give a short term sugar rush to the Indian economy,” Mukherjea writes in a recent blog, “the odds are high that without further measures to stoke consumption… consumption and therefore profit growth will once again slowdown in India.”
At the heart of the slowdown is a quietly escalating threat: AI-driven job losses across India’s most profitable industries—IT, financial services, and media. “Privately… the CEOs of these Indian firms tell us that anywhere between a fifth to a third of their workforce will gradually be eased out,” Mukherjea reveals. The targets? Call center workers, HR professionals, underwriters, coders, even marketing teams—all being replaced by cheaper, scalable AI.
“These IT firms, Financial Services firms and Media companies are some of India’s most profitable companies,” he notes. “However, given that cost of capital is low for them, it makes sense for these firms to replace labour with capital.”
The broader concern, however, is that India’s governance model is ill-prepared to handle this kind of disruption. “India’s governance apparatus is designed to address the problems of low income people, not middle income people,” Mukherjea writes. With an average taxpayer salary of ₹22 lakhs ($25,000), he argues that India’s middle class now resembles that of “a second world country like Portugal or South Korea,” facing far more complex economic demands.
Compounding the problem is a lack of institutional capacity to manage the shift. “Neither our polity nor our policymakers have experience of dealing with the challenges that second world countries face,” he writes, pointing to gaps in R&D incentives and higher education quality.
Mukherjea draws parallels to the “middle income trap,” a common pitfall for economies that fail to evolve after reaching a certain income level. “No country is able to grow decade after decade using the same economic model,” he cautions, referencing the 1997 Asian financial crisis as a warning.
The transition from a salary-driven to gig-based consumption economy, Mukherjea argues, will take two to three years—and government must step back rather than step in. “The government needs to get out of the way by reducing the many layers of red tape which hold down small businesses,” he writes. Without that shift, India’s middle class could bear the brunt of a stalled growth engine.
