India’s Path to Becoming a High-Income Economy

 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:
  1. Slow Reforms: Real GDP growth below 6%, keeping India in the upper-middle-income category without reaching high-income status.
  2. Business as Usual: Real GDP growth at 6.60%, resulting in moderate progress but no high-income status.
  3. 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.

Drishti Mains Question:

What key reforms are necessary for India to transition to a high-income economy?

UPSC Civil Services Examination: Previous Year Questions (PYQs)

Prelims

1. India’s ranking in the ‘Ease of Doing Business Index’ is sometimes seen in the news. Which organization declared that ranking? (2016)

   • (a) Organization for Economic Cooperation and Development (OECD)
   • (b) World Economic Forum
   • (c) World Bank
   • (d) World Trade Organization (WTO)
     Answer: (c)

2. Increase in absolute and per capita real GNP do not necessarily indicate a higher level of economic development if: (2018)

   • (a) Industrial output fails to keep pace with agricultural output
   • (b) Agricultural output fails to keep pace with industrial output
   • (c) Poverty and unemployment increase
   • (d) Imports grow faster than exports
     Answer: (c)

3. In a given year in India, official poverty lines are higher in some states than in others because: (2019)

   • (a) Poverty rates vary from State to State
   • (b) Price levels vary from State to State
   • (c) Gross State Product varies from State to State
   • (d) Quality of public distribution varies from State to State
     Answer: (b)

Mains

1. “Industrial growth rate has lagged behind in the overall growth of Gross Domestic Product (GDP) in the post-reform period.” Discuss the reasons and evaluate how recent changes in Industrial Policy can increase the industrial growth rate? (2017)

2. Normally, countries shift from agriculture to industry and then later to services, but India transitioned directly from agriculture to services. What are the reasons for the significant growth of services compared to industry in India? Can India become a developed country without a strong industrial base? (2014)

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