Can India escape middle-income trap?
Context:
The World Development Report 2024 by the World Bank highlights the “middle-income trap,” where countries face slowing growth as they approach higher income levels.
- It focuses on how economies like India face challenges in transitioning from middle to high-income status and suggests strategies to overcome this trap.
Relevance:
GS-03 (Economy)
Dimensions of the Article:
- India’s Middle-Income Trap: What is it?
- Challenges for India to escape the middle-income trap
- Suggested Measures
India’s Middle-Income Trap: What is it?
- It is a condition where a country’s growth slows down after reaching a certain income level.
- For India, this is a major concern as it risks stagnation when per capita income reaches 11% of the U.S. level.
- Over the past 34 years, only a few middle-income countries have successfully broken out of this trap, highlighting the difficulty of reaching high-income status.
Challenges for India to escape the middle-income trap:
- Stagnation in Manufacturing: Manufacturing which was a main driver of economic growth for most of the developing countries is no longer growing due to some factors such as premature deindustrialization and very less export growth.
- Wage Growth vs Inflation: Despite economic growth, wage growth in India is not keeping pace. According to the Periodic Labour Force Survey (PLFS), wages grew by only 5-7% between April and June 2023-24. This, coupled with inflation at around 5%, means real wage growth is stagnant, impacting workers’ ability to benefit from economic growth.
- Structural Reversal: Instead of progressing towards a more industrial and service-based economy, India has seen a reversal, with more people returning to agriculture or low-productive jobs, especially post-pandemic. This hampers the overall productivity of the economy.
- Power of Big Business: India’s economy is increasingly dominated by a few big business houses, many of which are seen as being close to the state. This concentration of power, without sufficient investments or innovation, limits the economy’s potential to grow at a fast pace.
Suggested Measures:
- Investment in Key Sectors: India needs to significantly increase investment in its infrastructure, education, and healthcare sectors. Building a robust foundation for growth requires not just physical investment, but also investment in human capital. Education, especially in technology and skills, is essential to drive innovation and productivity.
- Encourage Innovation and Technology Adoption: To move forward, India must focus on fostering innovation by adopting new technologies. It needs to create a conducive environment for domestic firms to innovate and compete on a global level. South Korea’s success story of blending state intervention with innovation can serve as a lesson here.
- Strengthen Democracy and Governance: One key difference between past success stories and India’s path is the role of democracy. South Korea and Chile were able to push their agendas under authoritarian regimes, but India must maintain its democratic framework. Strengthening governance, ensuring transparency, and promoting fair competition are crucial for sustainable growth.
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