India’s transition to a high-income country
is riddled with unknowns
Source: The Indian Express, February 22, 2025
India has remained a lower middle-income economy for nearly two decades, with significant disparities in per capita income across states. While western and southern states have the potential to move up the income ladder, the challenge lies in ensuring that poorer states catch up while avoiding the middle-income trap that has hindered many developing nations.
India’s Middle-Income Status
- Current Classification: India has been categorized as a lower middle-income country since 2007, with per capita income rising from $1,022 to $2,700.
- Future Projections: The per capita income required for upper middle-income status is $4,516, which India is projected to approach by 2029 but not surpass until the next decade.
- Middle-Income Trap Concerns: If a country remains in this category for nearly 30 years, it risks stagnation, making upward mobility even more difficult.
Regional Income Disparities
- Variations in Growth: States like Telangana ($4,306), Karnataka ($4,021), Haryana ($3,934), and Tamil Nadu ($3,807) are nearing upper middle-income levels, while Delhi ($5,579) has already surpassed the threshold.
- Growth Potential: These states are likely to achieve upper middle-income status within the next few years, driven by strong economic activity.
- Challenges for Poorer States: States like Bihar ($729), Chhattisgarh ($1,780), West Bengal ($1,861), and Odisha ($1,970) face significant hurdles in achieving comparable growth due to weak industrial and service sector development.
The High-Income Economy Challenge
- Ambitious Goal: The Indian government has set the target of becoming a high-income economy within the next two decades.
- Growth Requirements: To surpass $10,000 per capita income, western and southern states must grow at an even faster rate, avoiding stagnation and structural bottlenecks.
- China’s Experience: Even after decades of rapid expansion, China has yet to reach high-income status, highlighting the difficulty of sustaining long-term economic momentum.
Economic Activities and Industrial Growth
- Diverse Sectors: These leading states engage in a wide range of economic activities, including:
- Manufacturing: From apparel and automobiles to mobile phones and semiconductor production.
- Services: High-end IT services, chip design, and other advanced industries.
- Agriculture: Greater focus on value-added activities like dairy and poultry.
- Government Support: Policies like Production-Linked Incentives (PLIs) are reinforcing growth in manufacturing and services.
Labour and Capital Flow
- Migration Trends: Job seekers from across India are moving to high-growth states, ensuring a steady labor supply.
- Wage Control: A continuous inflow of workers can help regulate wages, keeping industries competitive.
- Access to Capital: These regions attract significant investment, but long-term growth depends on technological advancement and global competitiveness.
Challenges for Underdeveloped States
- Lack of Industrialization: Many states remain dependent on traditional agriculture and resource extraction, limiting their economic expansion.
- Political Considerations: The central government draws strong political support from these regions but has not implemented a robust strategy for their rapid development.
- Redistribution vs Growth: Redistribution policies alone cannot drive economic progress; sustainable industrial and service sector expansion is necessary.
Policy Choices and Future Growth
- Key Questions:
- Will India embrace freer trade or continue protectionist policies?
- Will economic policies favor a few national champions, limiting broader industrial growth?
- Can the government build strong institutions to sustain long-term expansion?
- Will political dynamics hinder economic aspirations?
- Growth Sustainability: India has maintained an average growth rate of 6% over the past three decades, but sustaining this trajectory—or reaching the 8% required for high-income status—demands strategic policy decisions.
Conclusion
India’s economic progress depends on its ability to sustain high growth in leading states while accelerating development in lagging regions. Avoiding the middle-income trap requires a mix of industrialization, technological advancement, and sound governance. Without well-crafted policies, economic stagnation remains a significant risk, as seen in many countries that failed to transition from middle to high-income economies.