In 2007, India joined the ranks of middle-income countries, classified, to be precise, as a lower middle-income economy. Almost 18 years later, it remains in that category.
Over these years, the country’s per capita income has risen from $1,022 to about $2,700. Some have argued that if a country remains a lower middle-income economy for 28 years — in India’s case that would mean a decade more — then it is caught in a lower middle-income trap. The per capita income now required to join the ranks of upper-middle-income countries is $4,516. Moving up to this category does seem possible in a decade, though not by the end of this decade. The IMF expects India’s per capita income to touch $4,195 by 2029.
There is, however, considerable variation across the country. For instance, the average incomes of western and southern states are far in excess of the rest of the country. Considering their growth trajectories, these states should graduate to upper-middle-income status over the coming years. Telangana, with a per capita income of around $4,306, will probably be the first to achieve that status in the next few years, followed by Karnataka ($4,021), Haryana ($3,934) and Tamil Nadu ($3,807). With an average income of $5,579, Delhi can already be classified as upper middle income.
The ruling dispensation has, however, set an ambitious task — of becoming a high-income, developed economy over the next two decades. This is challenging at many levels.
For India to reach a per capita income in excess of $10,000, the current growth structure necessarily requires western and southern states to have higher levels of per capita income, attaining high-income status years before. Put differently, these states will have to avoid the middle-income trap that has bogged down many countries. This is a tall order. Even China, after achieving spectacular growth over several decades, is yet to join the ranks of high-income economies. The ability or inability of these states to do so will perhaps become apparent by the middle of the next decade.
States in this region are trying to engage in activities across the entire spectrum — from low-cost/skill manufacturing to high-end manufacturing and skilled services. These range from apparel to cars, from mobile phone assembly to semiconductor units, and from IT services to chip design. Both market forces and government policy, exercised through PLIs, are reinforcing the manufacturing and services ecosystem in these regions. Even in the primary sector, these states are more engaged in higher value-added activities like dairy and poultry.
With more job opportunities in these regions, labour, across the skill spectrum, and capital should continue to flow to these states. This could help keep wages under check and ensure steady access to capital, possibly allowing them to maintain their competitiveness. Constraints such as a falling labour force, rising wages, the absence of skilled workers and capital accumulation could possibly be less of a hindrance for these states. The question then is: Can these states also acquire or develop the technological capabilities needed to expand further into higher value-added activities? Can they also keep their export engines humming? Or will their growth be constrained by central and/or state government policies?
At the same time, for the vast majority of states, where the bulk of the country’s population resides, moving up from the low-income category — like Bihar with an average income of $729 — or moving towards the upper middle-income levels — for states like Chhattisgarh ($1,780), West Bengal ($1,861) and Odisha ($1,970) — will be a difficult journey. In fact, lacking both a strong manufacturing and modern services base, the challenge for them is perhaps of a much greater magnitude. While some states do benefit from minerals, what beyond that? It is rather odd that considering the ruling dispensation draws its political strength more from these parts of the country, it has not made a more concerted attempt to boost their economic fortunes. Redistribution is not a growth strategy.
Thus, India’s development challenge, as some have also argued, exists at two levels. One, to ensure that the western and southern states do not get trapped in the middle-income trap. And two, to see to it that the poorer states grow rapidly. This will necessarily involve operating across the entire smile curve — engaging in both low and high-value-added activities.
To that end, the question is: What policies will the Centre adopt? Will it move towards freer trade or continue to prefer some form of protectionism? Will it press on with the national champions strategy, making it less likely for many more flowers to bloom? Will it build and nurture the institutions that are required to propel growth? And last, will politics limit economic possibilities? In a country where political power is divorced from economic power, where the more wealthy regions seemingly have less say over the Union government’s economic policies, is prosperity more or less likely? Voice matters.
Some have pointed to the fact that the Indian economy has grown at an average of around 6 per cent over the past three decades. And that this growth has been largely maintained despite the ups and downs of the economy under both coalition and majority governments, in the face of a global financial crisis and a pandemic. However, it is naive to assume that even this trend can be sustained for the next two decades without well-thought-out policies, let alone an 8 per cent growth trajectory needed to achieve high-income status. The history of the world is littered with examples of countries whose growth has stalled, whose economies have failed to make the transition from upper-middle-income to high-income status. This calls for a careful evaluation of economic policy. After all, getting caught in the middle-income trap is a failure of governance.
ishan.bakshi@expressindia.com
