India still fights in the middle-income trap, where growth slows after a certain level of income. The major problems currently are slow exports and increasing protectionism, while premature deindustrialization is another concern. For its survival over these challenges, India must zero in on investment, technological advancement, and domestic innovation. This line alone is crucial for sustaining growth and achieving inclusive economic progress. Addressing such concerns can help India become a high-income economy rather than just a middle-income economy.
| GS Paper | GS Paper II, GS Paper III |
| Topics for UPSC Prelims | World Development Report 2024, Middle-income trap, Premature deindustrialization, World Bank, 1991 liberalization, K-shaped recovery, Unified Payments Interface, Production-Linked Incentive (PLI) scheme, Total Factor Productivity, IMF’s World Economic Outlook, National Logistics Policy, International Solar Alliance. |
| Topics for UPSC Mains | Middle Income Trap for India, Measures that can Help India to Overcome the Middle-income Trap |
This editorial is based on “Can India escape middle-income trap?” published in The Hindu on October 13, 2024. It examines India’s economic challenges, including slowing exports and rising protectionism.
The study of the middle-income trap is very important for UPSC students because it bears in its subject area economic development along with international institutions topics in the syllabus. So, studying the same has been crucial for answering questions on the economic policies of India along with the growth strategies of India both in Prelims and Mains exams.
The middle-income trap is a relevant concept for the UPSC aspirant since it describes the plight of India in sustaining growth in the wake of global challenges. It would be crucial for any student appearing for the UPSC questions based on indices and reforms in the economy to study India’s problems and possible solutions so that in-depth critical insights in terms of growth strategies, policy development, and international economic comparisons can be identified.
One of the biggest hurdles to economic development is the middle-income trap. These are countries that move from a very low-income status to a middle-income status and then stagnate in middle-income strata and fail to advance into high-income strata. No country can sustain its growth and prosperity without overcoming this hurdle. The dynamics of this trap have to be understood well by aspiring countries like India to achieve advanced economic status.
One of the biggest hurdles to economic development is the middle-income trap. These are countries that move from a very low-income status to a middle-income status and then stagnate in middle-income strata and fail to advance into high-income strata. No country can sustain its growth and prosperity without overcoming this hurdle. The dynamics of this trap have to be understood well by aspiring countries like India to achieve advanced economic status.
Only 34 out of 134 middle-income countries managed to break this situation of a ‘trap’ over the last 34 years and become high-income countries. This, therefore, shows the nature of the complexity involved in breaking out of this trap. Strategic planning and innovation also prove to be a must-break out of economic stagnation.
India’s post-independence economic journey forms a story of gradual growth with main phases that have shaped the economy into the present structure. From this evolution, one can draw clues on opportunities and traps that must be overcome in order to bridge over the middle-income trap.
In the post-independence phase, India experienced slow growth with an essentially agro-based economy and enormous rates of poverty. Even in the 1990s, Economics was largely an interventionist policy and a license raj setup, and little scope existed for industrial development.
The turning point came in the year 1991 through economic liberalization, which brought a boost to growth and transformed the entire economic structure with the services sector creeping up along with rising foreign reserves as an indicator of an open economy.
This saw a decade of high growth, with the GDP expanding at an annual rate of 8-9%. The services sector was predominant and grew strongly through significant growth in software exports indicating that the economy had moved toward a knowledge-based economy.
There was unstable growth during the period and a widening gap between the rich and the poor, who however included a growing middle class. The economy of the country reflected the gaps in the movement of wealth distribution and lack of sustainability in fast growth.
The post-Covid era indicates economic recovery, with a marked increase in digital payments, but difficulties like unemployment and K-shaped recovery indicate the need for more inclusive growth strategies.
The challenges India faces in “getting out” of the middle-income trap are myriad, and all will call for some strategic interventions to be achieved to enable sustainable development and growth.
Premature deindustrialization, evidenced by a decline in manufacturing even before attaining high-income status, is one of the significant challenges India currently faces. This hampers growth within the economy, job creation, and the industrialization development process, which has been characterized by India’s failure to escape the middle-income trap and make sure there was sustained development. India’s manufacturing sector has not hit its potential at the time of stagnation in the contribution that is supposed to be achieved from this sector by GDP. This leaves it with less room for productivity gains, leading to poor economic diversification, an activity crucial for avoiding the middle-income trap.
India is caught in the middle-income trap through its services-led growth model, characterized by low job creation, productivity gaps, and income distribution, which discourage sustainable long-term economic growth. Growth remains driven by the services sector but fails to generate mass employment. Such a model calls for balanced growth strategies and the inclusion of robust manufacturing.
This translates to a slowdown in growth in the Total Factor Productivity in India, without which innovative and competitive competence and economic resilience can’t be sustained, the country failing to break through the middle-income trap that prevents it from achieving sustainable growth. Productivity growth in decline indicates inefficiencies in the generation of output in the economy. Reversal of this trend requires an increase in R&D investments as well as the nurturing of innovation for sustained competitiveness.
First, India faces the challenge of breaking out of the middle-income trap as a result of its dominance in the informal sector and low productivity. Low productivity follows such dominance of the informal sector and limited openness to technology is the other main factor that hinders India’s sustained economic growth and development toward the status of a high-income nation. Formalization of the economy helps out in augmenting productivity and general economic resilience.
In India, the demographic dividend can become a liability unless skill gaps, unemployment, and infrastructure-related problems of the economy are addressed soon, which may make it drift into middle-income stagnation without quick reforms. The young population of India can turn into a liability unless there is adequate development in the skills domain. Aligning education with industry requirements would be useful in tapping the demographic advantage.
Headwinds arising from global economics are critical in trying to avoid the middle-income trap, and they present challenges in terms of slow growth, rising inequality, technology gaps, and pressures on exports and investment. Generally, declining growth presents challenges to the export-led growth strategy of the economy. Those headwinds have to be addressed by diversifying the economy and improving domestic capabilities.
The country is also facing difficulties related to infrastructure and logistics bottlenecks, which are prohibiting its economic growth and development. That said, these bottlenecks are indeed the sources of inefficiencies that limit progress and pose a threat to India’s aspirations of escaping the middle-income trap. Infrastructural inadequacies continue to hinder economic advancement in the country despite investment. Removing these bottlenecks will be an important way of improving productivity and attracting high-value industries.
India can undertake strategic steps to solve this middle-income trap by emphasizing innovation, manufacturing, and skill development to achieve sustainable growth.
| Political: India’s political environment has been shaped by significant reforms and liberalization since 1991, contributing to economic growth. However, regulatory hurdles and bureaucratic inefficiencies still hinder progress in key sectors like manufacturing and technology. Additionally, India’s geopolitical stance and trade agreements will play a critical role in its ability to achieve sustained export-led growth. Economic: India faces challenges like premature deindustrialization and an over-reliance on the services sector, which limits balanced growth. Declining productivity and income inequality also pose long-term risks. Global economic factors, including the slowdown and rising protectionism, impact India’s export strategies. While the gig economy and digital payments have contributed to post-COVID recovery, these sectors may not offer long-term stability. Social: A mismatch between workforce skills and industry requirements threatens India’s ability to capitalize on its demographic dividend. The dominance of the informal workforce further impedes equitable growth, limiting access to resources and hindering productivity. Income inequality is another growing issue, which will need to be addressed to ensure inclusive economic development. Technological: Investment in research, development, and innovation is vital for India to overcome the middle-income trap, but current spending in this area remains low. Expanding digital infrastructure and embracing technology-driven solutions, such as green technologies, are essential strategies for future growth. Modernizing vocational training to meet industry needs is also critical for improving productivity and competitiveness. Environmental: India has an opportunity to position itself as a leader in green technologies and climate solutions, which can promote sustainable growth and create new industries. However, infrastructure deficiencies, particularly in energy and transport, increase business costs and negatively impact the country’s global competitiveness. Legal: Regulatory reforms to liberalize markets and enhance competition are essential for improving efficiency and fostering innovation. Strengthening intellectual property rights and reducing regulatory bottlenecks can help accelerate technological advancements and attract foreign investment, key factors in breaking the middle-income barrier. |
This requires targeted intervention in how India can break the middle-income trap, enhancing manufacturing, innovation, and reversing productivity ills. Improving digital infrastructure, better skill sets, and the adoption of green technologies will finally be required to get onto the path of sustainable growth. Proper implementation of such targeted policies will ensure India can indeed be that country that steps up to enter the high-income economy while promoting socially inclusive growth and global competitiveness.
| UPSC Civil Services Examination, Previous Year Questions (PYQs) Mains Q. Despite being a high savings economy, capital formation may not result in significant growth if it is misallocated.” Discuss this statement in the context of India.(UPSC Mains 2022, GS Paper III) Q. Discuss the concept of the middle-income trap as highlighted in the World Development Report 2024. What are the specific factors that make India susceptible to this trap, and how can the “3i” approach (investment, global technology infusion, and domestic innovation) help India avoid it? |
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