India’s Path to Becoming a High-Income Economy
For Mains: India's transition to a high-income economy, Middle-income trap and its implications for India
Why is this important?
A World Bank report titled “Becoming a High-Income Economy in a Generation” emphasizes that India must achieve an average annual growth rate of 7.8% for the next 22 years to reach high-income country status by 2047. The report underscores that substantial reforms and their effective execution will be vital to meeting this ambitious goal.
Key Highlights of the Report on Becoming a High-Income Economy
- India’s Economic Growth: India’s share in the global economy has increased from 1.6% in 2000 to 3.4% in 2023, positioning it as the 5th largest economy worldwide. Over the two decades before the pandemic, India’s economy grew at an average annual rate of 6.7%, second only to China among major economies.
- 2047 High-Income Economy Goal: India aims to become a high-income country by 2047. To do so, its Gross National Income (GNI) per capita must grow nearly eightfold from USD 2,540 in 2023 (currently categorized as lower-middle-income). In 2023, the World Bank categorized countries with a GNI per capita above USD 14,005 as high income, and those between USD 4,516 and USD 14,005 as upper-middle income.
- Growth Scenarios: The report presents three possible growth trajectories for India:
- Slow Reforms: Real GDP growth below 6%, keeping India in the upper-middle-income category without reaching high-income status.
- Business as Usual: Real GDP growth at 6.60%, resulting in moderate progress but no high-income status.
- Accelerated Reforms: Real GDP growth at 7.80%, enabling India to achieve high-income status by 2047.
However, few countries have managed to transition to high-income status in just 20 years, with examples such as Chile, Romania, and Poland, while others like Brazil, Mexico, and Turkey remain stuck in the upper-middle-income bracket, making this goal both ambitious and attainable.
Challenges in Achieving High-Income Status
- Declining Investment Rate: The investment-to-GDP ratio peaked at 35.8% in 2008 but fell to 27.5% in 2024.
- Foreign Direct Investment (FDI) Challenges: India’s FDI-to-GDP ratio is just 1.6%, significantly lower than Vietnam (5%) and China (3.1%).
- Labor Force Participation: India’s labor force participation rate (LFPR) is 55% in 2023, lower than other emerging economies (China’s LFPR is 65.8% in 2023).
- Female Labor Force Participation: Female labor force participation (FLFP) has improved to 41.7% in 2023-24, but global benchmarks show over 50%.
- Job Creation Issues: 45% of India’s workforce remains in agriculture, a sector marked by low productivity and disguised unemployment. Conversely, only 11% of India’s workforce is in manufacturing, and 7% works in modern market services—both far below East Asian economies. In 2023-24, 73% of India’s workforce holds informal jobs, compared to just 32.7% in other emerging economies.
- Trade Openness Decline: India’s exports and imports accounted for 46% of GDP in 2023, down from 56% in 2012.
- Low Global Value Chain (GVC) Participation: While India has made strides in mobile phone exports, high tariffs and non-tariff barriers limit broader trade expansion. India’s services sector (IT & BPO) is strong, but manufacturing is lagging.
Reforms Needed for Achieving High-Income Status
- Boost Investment: Raise the investment rate from 33.5% to 40% of GDP by 2035. Strengthen financial regulations to facilitate better credit flow.
- Improve Credit Access & Debt Resolution: Enhance Micro, Small, and Medium Enterprises (MSME) access to formal credit and strengthen bankruptcy and bad debt recovery mechanisms.
- Create More & Better Jobs: Increase labor force participation rates, approaching levels seen in economies like Vietnam (73%) and the Philippines (60%). Encourage private sector investment in job-rich sectors such as agro-processing, hospitality, transportation, and the care economy. Expand the skilled workforce and improve access to finance while strengthening modern manufacturing and high-value services.
- Boost Global Trade Competitiveness: Invest in export-oriented sectors and integrate into Global Value Chains (GVCs).
- Formalize the Workforce: Simplify labor laws to reduce informal employment and improve wage conditions.
- Enhance Human Capital & Innovation: Improve secondary school enrollment and vocational training to align with industry needs. Increase R&D investments in key sectors like Artificial Intelligence, Biotechnology, and clean energy.
Middle-Income Trap
- About the Middle-Income Trap: This concept, coined by the World Bank in 2007, describes economies that experience rapid growth but fail to transition to high-income status. Countries in the middle-income trap typically have a GNI per capita between USD 1,000 and USD 12,000 (2011 prices).
- Challenges in the Trap: These economies face issues like rising labor costs, weak innovation, income inequality, demographic challenges, and an over-reliance on specific industries.
- India’s Risk of Falling into the Trap: India is one of the most unequal countries, with the top 10% of the population holding 57% of the national income, while the bottom 50% share just 13%. High GST and corporate tax cuts favor the wealthy, further widening this gap. Stagnant wages, inflation, high household debt, and low savings make India vulnerable to the middle-income trap.
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