India’s Growth Challenges and the Middle-Income Trap

Source: The post India’s Growth Challenges and the Middle-Income Trap has been created, based on the article “India’s transition to a high-income country is riddled with unknowns” published in “Indian Express” on 22nd February 2025.

UPSC Syllabus Topic: GS Paper3- Economy

Context: The article discusses India’s economic growth and the challenge of moving from a lower-middle-income to a high-income country. It highlights regional income disparities, the need for better policies, and the risk of getting stuck in the middle-income trap without strong governance.

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

Why is India still a lower middle-income country?

1. India became a lower middle-income country in 2007 and remains in this category.
2. Its per capita income has risen from $1,022 to $2,700 in 18 years.
3. To reach upper middle-income status, India needs a per capita income of $4,516.
4. The IMF predicts India’s per capita income will be $4,195 by 2029, making the transition possible in the next decade.

What is the income status of Indian states?

1. Upper middle-income state: Delhi ($5,579).
2. States nearing upper middle-income: Telangana ($4,306), Karnataka ($4,021), Haryana ($3,934), Tamil Nadu ($3,807).
3. Lower middle-income states: Chhattisgarh ($1,780), West Bengal ($1,861), Odisha ($1,970).
4. Low-income state: Bihar ($729), far below the national average ($2,700).
5. Economic divide: Western and southern states have strong industries (IT, chip design, manufacturing), while poorer states lack industrial bases.
6. Future challenge: Ensuring all states grow rapidly and avoid stagnation.

What are the India’s developmental challenges?

1. Income Disparity: Western and southern states like Telangana ($4,306), Karnataka ($4,021), and Delhi ($5,579) have higher incomes compared to states like Bihar ($729), indicating significant regional income disparities.
2. Middle-Income Trap: With a per capita income growth from $1,022 to $2,700 in 18 years, India risks staying in the lower middle-income category without reaching the $4,516 needed for upper middle-income status.
3. Lack of Diverse Industries: Poorer states lack robust manufacturing and modern services sectors, essential for economic growth.

What are the risks of a middle-income trap?

1. India must avoid stagnation, which has affected many countries.
2. Even China has not yet become a high-income economy despite rapid growth.
3. Western and southern states need to advance in technology and high-value industries.
4. Factors like labour migration, skill development, and capital access will shape their success.

What policies can help India grow faster?

1. India needs clear economic policies to sustain high growth.
2. The government must decide between free trade and protectionism.
3. Supporting many industries instead of focusing on a few national champions is crucial.
4. Strong institutions and governance are necessary for sustained development.
5. Achieving high-income status requires an 8% growth rate, which is much higher than the current 6%.

Question for practice:

Discuss the challenges India faces in transitioning from a lower middle-income to a high-income country.