How India Can Overcome the Middle-Income Trap

Source: The post How India Can Overcome the Middle-Income Trap has been created, based on the article “Dodging a middle-income trap may take extra-economic efforts” published in “Live mint” on 30th December 2024

UPSC Syllabus Topic: GS Paper 3- Economy-Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment.

Context: The article discusses how India should adopt new economic policies and attitudes to avoid the middle-income trap and enhance growth. It emphasizes the need for increased investment, innovation, and structural reforms. It also critiques adopting Western socioeconomic narratives unsuitable for India’s economic context. How India Can Overcome the Middle-Income Trap

For detailed information on Can India escape middle- income trap? read this article here

What is the view of the World Bank’s chief economist on Indian Economy?

1. Indermit Gill, the World Bank’s chief economist, argues that India might take 75 years to reach a quarter of the United States’ per capita GDP, while China could achieve this in just 10 years.
2. He suggests that India needs new approaches and structural reforms to avoid the “middle income trap,” where growth slows as a country reaches a moderate level of income.

What Challenges Do Middle-Income Countries Face?

Middle-income countries, including India, face several challenges:

1. Growth Plateau: Countries in the middle-income range ($1,100 to $13,000 per annum) often experience a slowdown in growth, a phenomenon known as the middle-income trap.
2. Investment and Innovation: Effective growth requires significant investment in physical and human capital, and incentives for innovation. However, these are often insufficient.
3. Institutional Effectiveness: Structural reforms need strong institutions, but political and social limitations can hinder these changes.
4. Social and Political Resistance: For example, India’s attempt to reform farm laws failed due to lack of political support and public trust.

How Can India Overcome These Challenges?

1. Building Social Capital: Strengthening trust in government and social mechanisms to facilitate acceptance and support for policy reforms.
2. Adopting Suitable Policies: Avoiding unaffordable Western socioeconomic policies such as high taxes on the ‘rich’ and universal basic income, focusing instead on policies suited to India’s economic realities.
3. Increasing Productivity: Encouraging hard work and faster learning to improve labor productivity, which is notably lower than that in the US, China, Brazil, and South Africa.
4. Promoting Innovation and Structural Reforms: Invest in physical and human capital, provide incentives for innovation, and strengthen institutions to carry out necessary reforms effectively to foster growth and avoid the middle-income trap.
5. Adapting to Global Economic Shifts: Learn from global leaders like China in sectors such as electric vehicles, where creating new engines of growth in fast-changing technologies can offer substantial rewards.

For detailed information on Strategies to escape the middle-income trap read this article here

Question for practice:

Examine how India can adopt new economic policies to effectively avoid the middle-income trap and accelerate growth.